Everlast Dzingai n0110644j Final Project - 2

Analysis of ways to deal with non-performing loans affecting Zimbabwe Commercial Banks
FACULTY OF COMMERCE
DEPARTMENT OF FINANCE
ANALYSIS OF WAYS TO DEAL WITH NON-PERFORMING LOANS

AFFECTING ZIMBABWE COMMERCIAL BANKS
(2011-2015)
BY
EVERLAST DZINGAI
N0110644J
SUPERVISOR: MR E MBEDZI
SUBMITTED IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR BACHELOR OF COMMERCE
(HONOURS) DEGREE IN FINANCE
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Release form
Research Project by
Everlast Dzingai
Year of Completion
2015
I the undersigned, certify that l have read and recommend to National University of Science and
Technology (NUST) for acceptance a project entitled:
An analysis of ways to deal with non-performing loans affecting Zimbabwe Commercial banks
Submitted by Everlast Dzingai in partial fulfillment of the requirements for Bachelor of
Commerce Honours Degree in Finance.
Supervisor ..
Date../.../
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The Approval Form

The undersigned certify that they have read and recommended to the National University of
Science and Technology (NUST) acceptance, a project entitled Analysis of ways to deal with
non-performing loans affecting Zimbabwe commercial banks submitted by Everlast
Dzingai, student number N0110644J in partial fulfilment of the requirements for the Bachelor of
Commerce Honors Degree in Finance.
.................
Supervisor
..
Programme Co-ordinator
.
External Examiner
..
Date
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DEDICATION
I would like to dedicate this research to my family the Dzingai family for their support throughout my university life. I greatly appreciate your love may God bless you.
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ACKNOWLEDGEMENT
The attitude bliss and emphasis that accompanies the successful completion of my task would be
incomplete without the expression of appreciation towards those who helped me colour the
variety of this project with the tiles of their knowledge, expertise, experience and co-operation.
A special thanks goes to family and friends for their courage and unwavering support which
made this feat possible. Without them this would have been impossible
I extend my special thanks to my Respected supervisor, Mr. E. Mbedzi who has motivated and
inspired me throughout my project work with his timely guidance, help, support and supervision.
I also would like to thank all Bank managers, credit analysts, supervisors of commercial banks in
Zimbabwe who helped me providing data and information to complete my project.
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ABSTRACT
A strong banking sector is important for a healthy economy. The failure of the banking sector
may have an adverse impact on other sectors hence the whole economy. The study was driven by
the problem that non-performing loans are the major causes of the economic stagnation and
each non-performing loan in the financial sector is viewed as an obverse mirror image of an
ailing unprofitable enterprise, so their eradication is a necessary condition to improve the
economic status. A descriptive survey design was adopted as the research design. The population
of this study consisted of 12 commercial banks in Zimbabwe. In Zimbabwe the average ratio of
non-performing loans to total loans increased to 20.45% from 18.49% as at 30 September 2014,
The situation of non-performing loans calls for an effective strategy to remedy it before it gets
out of hand and this research work seeks to come up with recommendations that will help or
at least reduce the rate of non-performing loans in Zimbabwe. The primary data was collected
using structured questionnaires and analyzed using the statistical package for social sciences
(SPSS version 16) package. Tables and charts were used for presentation of the analyzed data.
The results of the study revealed that there are different causes of non-performing loans which
can be grouped into bank specific and macro-economic factors. It was observed that
Zimbabwean banks use various strategies to manage their NPLs; these strategies also affect the
levels of bank liquidity differently. The NPL management process is also marred by different
challenges that banks face. The research therefore concluded that the strategies of dealing with
non-performing loans which are currently affecting Zimbabwean banks are at individual bank
and national levels .This report deals with understanding the concept of NPLs, its magnitude and
major causes for an account becoming non-performing, and ways to Deal with NPLs with
special reference to Zimbabwe Commercial Banks.
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TABLE OF CONTENTS
DEDICATION ............................................................................................................................... iv
ACKNOWLEDGEMENT .............................................................................................................. v
ABSTRACT................................................................................................................................... vi
LIST OF ACRONYS ...................................................................................................................... x
LIST OF TABLES ......................................................................................................................... xi
LIST OF FIGURES ...................................................................................................................... xii
CHAPTER ONE ............................................................................................................................. 1
1.0 Introduction ............................................................................................................................... 1
1.1 Background of the study ........................................................................................................... 1
1.1.1Non-performing loans in Zimbabwe ....................................................................................... 3
1.2 Problem Statement .................................................................................................................... 5
1.3 Objectives ................................................................................................................................. 5
1.3.1 The primary objective ............................................................................................................ 5
1.3.2 Secondary objectives ............................................................................................................. 5
1.4 Research questions .................................................................................................................... 6
1.4.1 Sub-Questions ........................................................................................................................ 6
1.5 Scope of the study ..................................................................................................................... 6
1.6 Significance of the study........................................................................................................... 6
1.7 Limitations of the study ............................................................................................................ 7
1.8 Organization of the study .......................................................................................................... 8
CHAPTER TWO .......................................................................................................................... 10
2.0 Introduction ............................................................................................................................. 10
2.1 The financial impact of non-performing loans ....................................................................... 11
2.2 Causes of non-performing loans ............................................................................................. 12
2.2.1 Macro-economic factors ...................................................................................................... 12
2.2.2 Bank Specific factors ........................................................................................................... 14
2.3 Costs associated with non-performing Loans ......................................................................... 17
2.4 Strategies of dealing with non-performing loans .................................................................... 20
2.4.1 Ways to deal with non-performing loans at individual bank level ...................................... 20
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2.4.2 Ways to deal with non-performing loans at National level ................................................. 23
2.5 Challenges faced by commercial banks when managing Non-performing loans ................... 26
2.6 Factors to promote effective management of non-performing loans ...................................... 28
2.7 Empirical Evidence of non-performing loans ......................................................................... 29
2.7.1 Non-performing loans in Zimbabwe .................................................................................... 32
2.8 Conclusion .............................................................................................................................. 35
CHAPTER THREE ...................................................................................................................... 36
3.0 Introduction ............................................................................................................................. 36
3.1 Research approach .................................................................................................................. 36
3.2 Research paradigm .................................................................................................................. 36
3.3 Research Design...................................................................................................................... 37
3.3.1 Population ............................................................................................................................ 38
3.3.2 Sampling technique .............................................................................................................. 38
3.4 Data collection instruments..................................................................................................... 39
3.4.1 Primary sources .................................................................................................................... 39
3.4.1.0 Questionnaires................................................................................................................... 39
3.4.1.1 Administration of Questionnaires ..................................................................................... 40
3.4.2 Secondary Data Collection Methods ................................................................................... 40
3.4.3 Administration of the instruments ....................................................................................... 41
3.5 Pilot study ............................................................................................................................... 41
3.6 Reliability................................................................................................................................ 42
3. 7 Data Analysis and presentation .............................................................................................. 43
3.9 Conclusion .............................................................................................................................. 43
CHAPTER FOUR......................................................................................................................... 45
4.0 Introduction ............................................................................................................................. 45
4.1 The Response Rate .................................................................................................................. 45
4.1.1 Position held by respondent ................................................................................................. 46
4.1.2 Years of working experience on the position held............................................................... 47
4.1.3 Analysis of the administration and demographic section .................................................... 48
4.2 Presentation on analysis and interpretation of non-performing loans .................................... 48
4.2.1 Basic Understanding of Non Performing Loans ................................................................ 48
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4.2.2 Classification of Non-performing Loans ............................................................................. 49
4.3 Causes of NPLs ....................................................................................................................... 50
4.3.1 Bank specific factors of non-performing loans .................................................................... 52
4.3.2 Macroeconomic factors of non-performing loans........................................................... 52
4.3.3 Ranking of causes of non-performing loans ........................................................................ 53
4.4 Strategies to deal with NPLs ................................................................................................... 54
4.4.1 Strategies of dealing with non-performing loans at individual bank level .................. 54
4.4.2 Strategies at National level according to their order of importance .................................... 55
4.5 Challenges in Managing NPLs ............................................................................................... 55
4.6 Factors to promote effective management of NPLs ............................................................... 57
4.7 Analysis of the summarized results ........................................................................................ 60
4.8 Conclusion .............................................................................................................................. 61
CHAPTER FIVE .......................................................................................................................... 62
5.0 Introduction ............................................................................................................................. 62
5.1 Summary of Research Findings .............................................................................................. 62
5.2 Conclusions ............................................................................................................................. 63
5.3 Recommendations ................................................................................................................... 65
5.3.1 Recommendations to Commercial banks............................................................................. 65
5.4 Suggestions for future researches ........................................................................................... 67
REFRENCE .................................................................................................................................. 69
APPENDIX ................................................................................................................................... 72
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LIST OF ACRONYS
RBI:
Reserve Bank of India
RBZ:
Reserve Bank of Zimbabwe
RDBF Act:
Recovery of Debts Due to Banks and Financial Institutions Act
CLOs:
Collateralized Loan Obligations
DRT:
Debt Recovery Tribunal
MOF:
Ministry Of Finance
MPS:
Monetary Policy Statement
NPLs:
Non-performing Loans
PBC:
Peoples Bank of China
ICT:
Information, Communication and Technology
IMF:
International Monetary Fund
MBS:
Mortgage Backed Securities
ABS:
Asset Backed Securities
AMCs:
Asset Management Corporations
ARC:
Asset Reconstruction Company
BIS:
Bank of International Settlement
CLB:
Company Law Board
SARFAESI Act:
Securitization and Reconstruction of Financial Assets and Enforcement of
security Interest Act
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LIST OF TABLES
Table 4.1 Analysis of the administration and demographic section ............................................. 48

Table 4.2: Analysis of categories NPLs ....................................................................................... 50
Table 4.3 Analysis of Causes of NPLs ......................................................................................... 51
Table 4.4 Ranking of the causes of NPLs ..................................................................................... 54
Table4.5: Strategies at Bank level ................................................................................................ 55
Table 4.6: Strategies at National Level ......................................................................................... 55
Table 4.7 Analysis of summarized results .................................................................................... 60
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LIST OF FIGURES
Figure 2.1 : Causes of rise in non-performing loans 2013............................................................ 33
Figure:2.2 Non-Performing loans in Zimbabwe ........................................................................... 34
Figure 4.1 Response rate on different types of banks ................................................................... 45
Figure 4.2 Position held of respondent ......................................................................................... 46
Figure 4.3: Years of experience of respondents............................................................................ 47
Figure 4.4 Definition of NPLs ...................................................................................................... 49
Figure 4.5 Classification of NPLs ................................................................................................. 50
Figure 4.6 causes of NPLs ............................................................................................................ 51
Figure 4.6.1 Bank specific Factors of NPLs ................................................................................. 52
Figure 4.6.2 Macro economic factors of NPLs ............................................................................. 53
Figure 4.7: Challenges in Dealing with NPLs .............................................................................. 57
Figure 4.8 Factors to Promote effective management of NPLs .................................................... 59
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CHAPTER ONE
INTRODUCTION
1.0 Introduction
Wanjira (2010) asserts that most developing economies are burdened by a large proportion of
bad loans and risky credits. Since commercial banks are in financial arbitrage that is, mobilizing
money from the depositors and lending it to borrowers at an interest, non-performing loans
create several problems for commercial banks thus hindering the efficient functioning of banks.
Non-performing loans are those loan facilities which borrowers often have difficulties repaying.
Managing non-performing loans is one of the ways of reducing problems faced with the
commercial banks of Zimbabwe.
This chapter brings out the basic understanding of the study. It looks at the background of the
study followed by statement of the problem, research objectives and questions, statement of
hypothesis, justification, assumptions and scope of the study. Finally the limitations of the study
will also be looked into.
1.1 Background of the study
According to Richard (2011), commercial banks play an important role of mobilizing savings
and adding capital in the economy, thus encouraging investment and production. In most
economies commercial banks are largely the source of credit for firms and households
(Ross,1997) .A well operating banking sector is necessary and important for economic growth,
while poorly functioning banks hinder economic growth .
The banking industry throughout the world has always been affected by the problem of nonperforming loans although a thorough risk assessment may have been done to determine the
credit worthiness of individual clients. Non-performing loans can be defined as credit facilities,
which for a long time do not generate return (Caprio and klingebiel, 2002).
The issue of non-performing loans has gained increasing attention in the last few decades. In the
last two decades the increase of non-performing loans has led to a number of commercial bank
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failures. For instance in Indonesia where over sixty banks collapsed during the East-Asia
financial and banking crisis, non-performing loans represented 75% of the loans portfolios
(Caprio and Klingebiel, 2002). Increase in non-performing loans also eroded the profitability of
banks so this has called for an increase in the attention to non-performing loans. The issue of
loan default (NPLs) is becoming an increasing problem that threatens the sustainability of banks
(Caprio, 1997) .According to the study carried out by Takayasu K ,&Yokoe. Y, (1994), nonperforming loans can lead to efficiency problem for banking sector.
The causes of the problem of non-performing loans are multi-dimensional among different
literatures. Good hart et al (1998) connected lending to the causes of bank failure. Studies in
other countries show that most of bank failures have been caused by non-performing loans
(Brownbridge, 1998). Ahmad (2002), in analyzing the Malaysian financial system, reported
a significant relationship between credit risk and financial crises and concluded that credit risk
had already started to build up before the onset of the 1997 Asian financial crisis, and became
more serious as non-performing loans increased. Moreover there is evidence that the level of
non-performing loans in the US started to increase substantially in early 2006 in all sectors
before the collapse of the sub-prime mortgage market in August 2007 (Greenidge and
Grosvenor, 2010).
Palubinskas and Stough (1999) note that the failure of a bank is mainly seen as a result of
mismanagement because of bad lending decisions made with respect to wrong appraisal of credit
status, or the repayment of non -performing credits and excessive focus on giving loans to certain
customers. Good hart et al (1998) also state that poor credit control, which results in undue credit
risk, causes bank failure. Palubinskas and Stough (1999) note that lack of dependable financial
information on borrowers to help in assessing creditworthiness causes a bank failure. Chimerine
(1998) adds that a bad lending tradition leads to a large portfolio of unpaid loans. This results in
insolvency of banks and reduces funds available for fresh advances, which eventually causes a
financial
In Africa, Brownbridge, (1998) and Richard (2011) concludes that many of the bad debts in
banks were attributable to moral hazards; the adverse incentives on bank owners to adopt
imprudent lending strategies, in particular insider lending at high interest rates to borrowers in
the most risky segments of the credit market. To the borrowers side, they also tend to divert the
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funds to risky investments once they are granted the loans. For instance in Nigeria moral hazard
fueled insider trading and it is believed to have account for over 65% of impaired loans for four
banks liquidated in 1995.Similarly most of the large banks in Kenya also engage in extensive
insider trading (Brownbriidge,1998).In Nigeria insider leading accounted 65% of the Nigerian
banks liquidated in 1995.All the loans were deemed irrecoverable (Ikhede,1996)
1.1.1Non-performing loans in Zimbabwe
The problem of non-performing loans is common in Zimbabwe where some banks have been
liquidated in 2004 and 2005 (Monetary Policy Statement, 2006). Commercial banks that were
closed during this period include Barbican Bank Limited, CFX Bank Limited, Royal Bank
Limited, Time Bank of Zimbabwe Limited and Trust Bank Limited. The Monetary Policy
Statement indicated that the demise of these institutions was significantly attributed to nonperforming loans ( Monetary Policy Statement (MPS), 2006).
In January 2012, the Governor of the Reserve Bank of Zimbabwe, Dr Gideon Gono noted with
concern the gradual deterioration in asset quality as reflected by the level of non-performing
loans (MPS, 2012). He highlighted that asset quality challenges can potentially heighten liquidity
risks given the current operating environment where credit is largely financed by volatile short
term deposits. In this regard, he urged banking institutions to enhance their credit risk
management systems with special emphasis on credit assessment, origination, administration,
monitoring and control standards. Fofack (2005) argues that when left unsolved, non-performing
loans can compound into financial crisis, the moment these loans exceed bank capital in a
relatively large number of banks.
On 11 June 2012 Interfin Bank Limited was placed under recuperative curatorship (MidTerm MPS, 2012). The Governor of RBZ issued a press statement advising of the
closure of Royal Bank Limited after the directors of the bank resolved to surrender their
license on 27 July 2012 (RBZ Press Statement, 2012). Non-performing loans were cited as
the major common problem that was faced by Interfin-Bank Limited. This is the second time
within a period of eight years that Royal Bank Limited has failed (Mid -Term MPS, 2012 and
RBZ Press Statement, 2012). Apparently in both cases the issue of non- performing loans was
mentioned. Demirgue Kunt et al (1989), cited in Berger and De Young (1997), indicate that
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failing banks have huge proportions of bad loans prior to failure and that asset quality is a
statistically significant predictor of insolvency.
On July 27, 2012, Royal Bank Zimbabwe Limited surrendered its banking license to the
RBZ.
Onsite inspection
by
the
RBZ
determined
that
the
bank
was
critically
undercapitalized, faced chronic liquidity challenges and liabilities to the RTGS system,
had high non-performing insider loans, and had been misrepresenting information to the
RBZ.
In Zimbabwe, the loan-to-deposit ratio, calculated on the basis of total bank deposits increased
from 84.6 percent in May 2012 to 86.2 percent in June 2012 (RBZ, 2012). According to the MidYear Fiscal Policy Statement presented on the 18thof July, non-performing loans were 9.9
percent as at 30 June 2012 as shown in Figure 1 below. IMF (2012) also indicates that nonperforming loans in Zimbabwe increased from 6 percent on average at end-December 2011 to 10
percent at end-June 2012. This is higher than the prudential threshold of 5 percent stipulated in
Basel II (Basel, 2004; ADF, 2012).
Non-performing loans could rise further with the
ongoing deceleration in economic activity (IMF, 2012).

Kachembere (2013) also noted that statistics released recently in June 2013 by the World
Bank have shown that non-performing loans in Zimbabwe have increased from about 3,2
percent in March 2009 to 15,3 percent in May 2013. He also outlined that market observers say
from the recent announced financial results, banks have been reporting high credit
defaults and the same is confirmed by credit retailers as well as companies that are supplying
products and services on credit.He furthermore highlighted that NMB Holdings saw its nonperforming loans almost doubling to 22.8 percent of its loan book in the first half of the year
2013, a development viewed by management as due to the stagnation and liquidity problems
facing the economy.et.al, 2001).
According to the Quarterly Industry Report of Zimbabwe - September 2014:
A total of 13 banks out of the 20 operating banking institutions recorded profits. The losses
recorded by the other seven banking institutions are attributed to high levels of non- performing
loans and lack of critical mass to generate sufficient revenue to cover high operating expenses.
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Liquidity and credit risk remained a key challenge across a number of institutions. The average
ratio of non-performing loans to total loans increased to 20.45% as at 30 September 2014, up
from 18.49% as at 30 June 2014.In an effort to address the problem of NPLs, the Reserve Bank
in collaboration with the Ministry of Finance, has established an asset management company
(Zimbabwe Asset Management Company (ZAMCO)) which will buy non-performing loans from
financial institutions .
1.2 Problem Statement
Loan portfolios constitutes the largest operating assets and source of revenue of most financial
institutions, however, some of the loans given out become non-performing and adversely
affect the profitability and overall financial performance of the lending institutions. Many
lending institutions in Zimbabwe are confronted with the challenge of rising non-performing
loan portfolios despite efforts of reducing them. According to the 2013 Mid-year fiscal policy,
the upward trend in non-performing loans is a cause of concern. The average ratio of nonperforming loans to total loans in Zimbabwe increased to 20.45% from 18.49% as at 30
September 2014, The situation of non-performing loans calls for an effective strategy to
remedy it before it gets out of hand and this research work seeks
recommendations that will help
or
to come up with
at least reduce the rate of non-performing loans in
Zimbabwe.
1.3 Objectives
1.3.1 The primary objective
To find out the strategies of dealing with non-performing loans which are currently affecting
Zimbabwean banks.
1.3.2 Secondary objectives
i.
To find out the causes and types of non-performing loans.
ii.
To determine the strategies of dealing with non-performing loans at individual bank

level in Zimbabwe.
iii.
To identify challenges commercial banks faces in managing non-performing loans
iv.
To inaugurate ways of eliminating non-performing loans at national level in Zimbabwe.
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v.
To find out factors that promotes the effective and active management of nonperforming loans.
1.4 Research questions

The study will attempt to answer the following questions:
The research Question
What strategies are needed to deal with non-performing loans which are currently affecting
Zimbabwean banks?
1.4.1 Sub-Questions
i.
What is the meaning, causes and types of non-performing loans?
ii.
What are the strategies needed to eradicate non-performing loans at individual bank
level?
iii.
What are the strategies of eliminating non-performing loans at national level

in Zimbabwe?
iv.
What are the factors that promote the effective management of non-performing
loans?
1.5 Scope of the study

The research will focus on finding solutions to the problems of non-performing loans which
commercial banks in Zimbabwe are facing at the moment. The study will be limited to
ways of dealing with non-performing loans affecting Zimbabwean commercial banks only . The
study will focus on commercial banks only and will be carried out within the cities of Harare and
Bulawayo since these are the major cities in the country. It shall cover the period from 2009 to
2014 which is the period of dollarization.
1.6 Significance of the study
To commercial banks
The research will help commercial banks in Zimbabwe with solutions on non-performing
loans. It will highlight to all bank managers, credit analysts, credit committees and boards on
how best they can solve the problems of non-performing loans and as a result equipping them
with knowledge which rescue their organizations from facing challenges of liquidation as a result
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of non-performing loans. It will also help with recommendations as to how they can plan
strategically in line with changes in the macro environment.
Customer confidence which is the core of banking business will be increased within banks as
they become more liquid if they eliminate non-performing loans. As such financial
inclusiveness will be improved also as those monies tied up in the informal sector will
be then channeled towards banking system since customers will be having more confidence in
the banking industry.
To corporate clients
Once the strategies of dealing with non-performing loans have been put in place then it will
mean that other corporate clients will benefit indirectly since financial institutions will be
liquid and as such lending rates will be able to be increased to match their demand. This will also
improve their business.
Other industries
The project would be of benefit to the Zimbabwean banking and non-banking financial
sectors as a whole since the financial(Lending institutions) in the country operate within the
same environment and deal with customers of similar characteristics. This will help in
managing loan portfolio problems thus improving asset quality which then releases the liquidity
which is currently tied up in non-performing loans. With this in mind production industries
which are currently non-operational will tend to benefit from this research as they will be able
to access loans from banks whose liquidity would have enhanced so that they can
resuscitate their activities. This will go a long way in reviving the economy as a whole since the
strength of an economy lies in its production sector.
Overally this will improve the standards of living for Zimbabweans thus the enhancement of
economic development and growth.
1.7 Limitations of the study
The management of the research population at some instances might be unwilling

to disclose information they view internal and sensitive, to this the researcher will
clearly advise them that the data is purely for academic purposes.
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The inconsistent data and numbers about non-performing loans is the other challenge for
the researcher to approach the phenomenon.
Acknowledging the challenge the research will be conducted in qualitative method. After
all, the purpose of this paper will be analyzing strategies to deal with non-performing
loans; the choice of purpose is reasonable.
Closed questionnaire limited some responded while some respondents were not
comforted with open questionnaires. To deal with the challenge the researcher adopted
open and closed questionnaire to accommodate all respondents.
1.8 Organization of the study

Chapter two reviews various literatures that have been published concerning the subject of nonperforming loans. The literature will be looked into on a broader perspective in order to answer
the research objectives which are limited to the Zimbabwean situation. The researcher starts by
finding out what literature says about the meaning, types and causes of nonperforming
loans. Literature concerning the strategies of dealing with non-performing loans at individual
bank level and at national level shall also be looked at together with the conditions
which are suitable for the successful implementation of the strategies that eradicates nonperforming loans in Zimbabwe
Chapter three explains the research methods used to accomplish the objectives of this study. It
elucidates how the researcher conducted the research; the research methodologies employed that
is primary and secondary data collection methods and various techniques under these
methodologies utilized and the justifications for their use, and the challenges met and how they
were managed. It describes the method of data collection, contact methods, the instruments
used and the sampling procedure as well as the administration of the instruments used. The
chapter concludes with data analysis and presentation.
Chapter four will report on the findings of the study. The findings are presented first, with
an analysis of the data following and then comments are made based on the findings
from the questionnaires. Presentation of statistical data takes the form of tables, pie charts and
graphs with content analysis being used for non-statistical data.
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Chapter five entails a summary of the research findings and the methods used in obtaining the
data for the study. It further provides conclusions and recommendations relating to the study
objectives. In addition, suggestions for future research on the study would be given
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CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
There is no global standard to define non-performing loans at the practical level (YixinHou,
(2003). Van Greuning and Bratavonic (2003) defined a non performing loan as an
advance by a financial institution that is not earning income and full payment of principal. As
such interest is no longer anticipated. The Reserve Bank of Zimbabwe (RBZ) Statutory
Instrument 205 of 2000 defines non-performing loans strictly as those loans that have ceased to
generate any income for the bank. The supervisory body primarily looks at assets where the
lender no longer has hope of having full repayment of outstanding financial obligations in the
form of both principal and interest. For prudence purposes interest on such accounts is suspended
and will only be booked once it has been collected. The regulators view is much more objective
because the whole essence of
creating assets is to earn income and the lender will be able to
realize income on an asset when it performs. Failure of an asset to perform would force the
lender to set aside provisions to cushion the institution against potential losses emanating from
the loan in service default
According to IMF (2012), a loan is non-performing when payment of interest and principal are
past due by 90days or more, or at least 90 days of interest payment have been capitalized,
refinanced or delayed by agreement, or payment are less than 90 days overdue, but are other
good reasons to doubt that payment will be made in full.The definition by IMF agrees with that
of Curtis Seubert (2013), who pointed out that there are three types of non-performing loans and
these are: loans 90 days past due and still accruing interest, loans which have been placed in
nonaccrual (not accruing interest) and taken off income statement, and real estate that has been
foreclosed upon (or a deed in lieu of foreclosure).According to Alton and Hazen (2001) nonperforming loans are those loans which are ninety days or more past due or no longer accruing
interest. Hennie (2003) agrees arguing that nonperforming loans are those loans which are not
generating income. This is further supported by Caprio and Klingebiel (1996), cited in Fofack
(2005), who define non-performing loans as those loans which for a relatively long period
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of time do not generate income that is, the principal and or interest on these loans have been
left unpaid for at least ninety days.
The term bad loans as described by Basu (1998) in Fofack (2005) is used interchangeably with
non- performing and impaired loans. Berger and De Young, (1997) also consider these types of
loans as problem loans. In effect, these would be considered bad or toxic assets on the banks
books (Bexley and Nenninger, 2012). These descriptions were used interchangeably during the
study.
According to the Bank of International Settlement (B.I.S) non-performing loans are
categorized into three groups which are substandard, doubtful and virtual loss. Firstly
substandard loan are defined as loans whose interest or principal payments are longer than three
months in arrears of lending conditions. Doubtful loans are also defined as loans whose full
liquidation of outstanding debts appears doubtful and the accounts suggest that there will be a
loss, the exact
amount
of which cannot
be determined as
yet.
Virtual
Loss
(unrecoverable) loans are outstanding debts which are regarded as not collectable, usually
loans to firms which applied for legal resolution.
From the various researchers, it could be deduced therefore that a non-performing loan is one
that is not serviced for a certain period as stipulated by the regulatory authorities commonly
ninety days and the original conditions of the loan contract would have been wavered.
2.1 The financial impact of non-performing loans
The failure of banks to recover interest and principal payments from NPAs could have some
disastrous effects. According to the study done by K. Siva Sanka and G. Ramesh Pandi(2014) on
challenges faced by Indian banks the following are the financial impact of non-performing loans
which they came up with;
a) Owners will lose their assets
b) Depositors will lose their assets or uninsured balance and banks will charge higher
interest rates to share losses with borrowers.
c) Non-performing loans means there are some resources which are under-utilized due to
misallocation of resources. Idle resources will reduce productivity in the whole economy
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d) Non-performing loans may spill over the banking system and contract the money stock,
which may lead to a financial crisis.
2.2 Causes of non-performing loans

Over the last few years the literature that examines non-performing loans has increased
as more researchers attempt to understand the major factors that cause financial instability. The
causes of non-performing loans can be classified into macroeconomic factors and bank
specific factors according to different sources of literature consulted.
2.2.1 Macro-economic factors
Carey (1998) argues that the state of the economy is the single most important systematic
factor
influencing
diversified debt portfolio loss rates. The
relationship
between
the
macroeconomic environment and loan quality had been investigated linking the phase of
the business cycle with banking stability. In this line of research, the hypothesis is
formulated that the expansion phase of the economy is characterized by a relatively low
number of NPLs, as both consumers and firms face a sufficient stream of income and
revenues to service their debts. However as the booming period continues, credit is
extended to lower-quality debtors and subsequently, when the recession phase sets in, NPLs
increase. Empirical studies tend to confirm the afore mentioned link between the phase of the
cycle and credit defaults. Quagliarello (2007) find that the business cycle affects the NPL
ratio or a large panel of Italian banks over the period 1985 to 2002.
Low productivity
Furthermore, Cifter (2009), using neural network, found a lagged impact of industrial production
on the number of non-performing loans in the Turkish financial system over the period January
2001 to November 2007. Moreover, Salas and Saurina (2002) estimated a significant negative
effect of GDP growth on the NPL ratio and infer a quick transmission of macroeconomic
developments to the ability of economic agents to service their loans. It seems plausible to
include other macroeconomic variables, aside from GDP growth, such as unemployment
and interest rates as these may provide additional information regarding the impact of
macroeconomic conditions on household and firms.
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Unemployment
An increase in the unemployment rate should influence negatively the cash flow streams of
households and increase the debt burden (Louzis D.P (2010). With regards to firms, increases in
unemployment may signal a decrease production as a consequence of a drop in effective
demand. This may lead to a decrease in revenues and a fragile debt condition. The interest rate
affects the difficulty in servicing debt, in the case of floating rate loans. This implies that the
effect of the interest rate should be positive, and as a result the increasing debt burden caused
from rising interest rate payments should lead to a higher number of NPLs.
The choice of GDP, unemployment and interest rate as the primary determinants of
NPLs may also be justified from the theoretical literature of life-cycle consumption
models. Lawrence (1995) examines such a model and introduces explicitly the probability of
default. The model implies that borrowers with low incomes have higher rates of default.
This is explained by their increased risk of facing unemployment and being unable to
pay.
Additionally, in equilibrium, banks charge higher interest rates to riskier clients. Rinaldi and
Sanchis-Arellano (2006) extend Lawrences model by including the possibility that agents
can also borrow in order to invest in real or financial assets. After solving the optimization
problem of an agent, they derive the probability of default which depends on current income, the
unemployment rate (which is linked to uncertainty regarding future income) and the
lending rate.
However Nkusu (2011) analyzed the linkage between nonperforming loans and macroeconomic
performance of 26 advanced economies from 1998 to 2009. In his study, only macroeconomic
variables were introduced. Specifically, GDP growth, unemployment, change in the house price
index, change in the equity price index, inflation, nominal effective exchange rate, policy rate of
interest and credit to the private sector were included in his empirical specification. His findings
revealed that a poor macroeconomic performance (i.e. slower GDP growth, higher
unemployment or decreasing asset prices) could be associated with increasing non-performing
loans in advanced economies.
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In contrast to Nkusu (2011), the study of De Bock and Demyanets (2012) analyzed the
determinants of bank asset quality in 25 emerging countries during 1996-2010, by examining
only aggregate macroeconomic and credit indicators. Their findings present that GDP growth
rate, exchange rates and loan growth are the main determinants of non-performing loans in the
examined countries.
2.2.2 Bank Specific factors
Many researches on the cause of bank failures find that asset quality is a statistically
significant predictor of insolvency (e.g. Dermirgue-Kunt 1989, Barr and Siems 1994), and
that failing banking institutions always have high level of non-performing loans prior to
failure.
A strand in the literature also has examined the connection between bank-specific factors and
NPLs. In their seminal paper, Berger and DeYoung (1997) investigate the existence of
causality among loan quality, cost efficiency and bank capital using a sample of U.S.
commercial banks for the period 1985-1994. They codify and test four hypotheses concerning
the flow of causality between these variables which are bad luck hypothesis, bad management
hypothesis, skimping, and moral hazard.
Poor management
Under, Bad luck hypothesis Berger and DeYoung proposed that exogenous increases in
nonperforming loans cause decreases in measured cost efficiency. The underlying argument is
that a high number of problem loans leads to extra operating costs associated with dealing with
them. Again with Bad management hypothesis low cost efficiency is positively associated
with increases in future nonperforming loans. The proposed justification links bad management
with poor skills in credit scoring, appraisal of pledged collaterals and monitoring
borrowers.
Poor monitoring
Furthermore with Skimping hypothesis Berger and DeYoung (1997) articulated that high
measured efficiency causes increasing numbers of NPLs. According to this view, there exists a
tradeoff between allocating resources for underwriting and monitoring loans and measured
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cost efficiency. In other words, banks which devote less effort to ensure higher loan quality will
seem to be more cost-efficient; however, there will be a burgeoning number of NPLs in the long
run. Lastly with Moral hazard hypothesis low capitalization of banks leads to an increase
in non-performing loans. The link is supposed to be found in the moral hazard incentives
on the part of banks managers who increase the riskiness of their loan portfolio when their banks
are thinly capitalized.
Poor cost efficiency
Podpiera and Weill (2008) examine empirically the relation between cost efficiency and
nonperforming loans in the context of the Czech banking industry for the period 1994 to 2005.
They conclude that there is strong evidence in favor of the bad management hypothesis and
propose that regulatory authorities in emerging economies should focus on managerial
performance in order to enhance the stability of the financial system (by reducing
nonperforming loans).
Poor credit appraisal
Poor credit appraisal; wrong products offered to clients; banks in pursuit of business adjusted the
clients requirements; lending based on balance sheet strength instead of Causes of nonperforming loans in Zimbabwe cash flows; information asymmetry as a result of the
absence of a credit bureau in Zimbabwe; economic environment mainly characterized by
low levels of aggregate demand; inadequate supervision by the Reserve Bank of Zimbabwe
leading to gross violation of prudential guidelines.
Bank size and loan concentration
Salas and Saurina (2002) found a negative relation between bank size and non-performing
loans and argue that bigger size allows for more diversification opportunities (Hu- et-al (2004)
and Rajan and Dhal (2003) report similar empirical evidence). Another strand of literature has
focused on the degree of loan concentration in various sectors, and proposes that
vulnerabilities within sectors of high loan concentration tend to exacerbate the non
performing ratio (Herring and Wachter, 1999) as cited in (Guy, 2011).
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However beside macro-economic and bank specific factors there are also other factors which
causes non-performing loans which are explained below:
Information asymmetry
The theory of asymmetric information tells us that it may be difficult to distinguish good
from bad borrowers (Auronen, 2003) in Richard (2011), which may result into adverse
selection and moral hazards problems. The theory explains that in the market, the party that
possesses more information on a specific item to be transacted (in this case the borrower) is in a
position to negotiate optimal terms for the transaction than the other party (in this case, the
lender) (Auronen, 2003) in Richard (2011). The party that knows less about the same
specific item to be transacted is therefore in a position of making either right or wrong
decision concerning the transaction. Adverse selection and moral hazards have led to
significant accumulation of non- performing loans in banks (Bester, 1994; Bofondi and
Gobbi, 2003).
According to Abalkhail and Presley (2001), the lack of information transfer between
investors and entrepreneur exposes the investors to the risk of adverse selection and moral
hazard. Information seems to be a very important element in a financial market.
Stiglitz(1985) suggested that a capital market is informational efficient when the prices reflect
the available information.
Keeton (1999) uses data from 1982 to 1996 and a vector auto regression model to analyze the
impact of credit growth and loan delinquencies in the US. It reports evidence of a
strong relationship between credit growth and impaired assets. Specifically, Keeton (1999)
shows that rapid credit growth, which was associated with lower credit standards,
contributed to higher loan losses in certain states in the US.
Poor performance of certain sectors
Morris (1987) presented one of the earliest studies to examine the causes of loan losses. In his
studies Morris examined the losses by 2,470 insured commercial banks in the United
States (US) over the 1979-85. Using non-performing loans net of charge-offs as the primary
measure of loan losses Keeton and Morris (1987) shows that local economic conditions along
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with the poor performance of certain sectors explain the variation in loan losses recorded by the
banks. The study also reports that commercial banks with greater risk appetite tend to
record higher losses.
In short, the causes of non-performing loans varies several authors have come up with different
causes of non-performing loans. The causes can be bank internal, macroeconomic, political etc.
Salas and Saurina (2002) combine macroeconomic and microeconomic variables as
explanatory regressors to explain NPLs in a study which is concerned with Spanish
Commercial and Savings Banks (for the period 1985-1997). They estimate a statistically
insignificant effect of lagged efficiency on problem loans and a negative influence of lagged
solvency ratio to NPLs which is consistent with the moral hazard hypothesis. In addition,
they find a size effect i.e. large banks seem to have fewer NPLs.
Sinkey and Greenwalt(1991) investigated the loan loss-experience of large commercial
banks in the US; they argue that both internal and external factors explain the loan-loss rate of
these banks. These authors find a significant positive relationship between the loan-loss rate and
internal factors such as high interest rates, excessive lending, and volatile funds. Similar to the
previous study, Sinkey and Greenwalt (1991) report that depressed regional economic conditions
also explain the loss-rate of the commercial banks. A study conducted by Espinoza and
Prasad (2010) focused on macroeconomic and bank specific factors influencing nonperforming loans and their effects in GCC Banking System. After a comprehensive analysis,
they found that higher interest rates increase non-performing loans but the relationship was not
statistically significant.
2.3 Costs associated with non-performing Loans
Inaba , Kozu , and Sekine , (2003) have done a research on how the increase in non-performing
loans (NPLs) affected real economy activity in Japan. They examined the respective roles played
by the firms' and banks' balance sheet condition in determining firm investment and bank
lending. Non-performing loans (NPLs) hampered firm investment via deterioration in both firms'
and banks' balance sheet condition. In a sense, the deterioration in banks' balance sheet condition
may be said to have had a propagation effect, because it distorted the investment of bankdependent firm, even when the balance sheet of the latter were in good condition.
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Non-performing loans can lead to efficiency problem for banking sector. It is found by a number
of economists that failing banks tend to be located far from the most-efficient frontier (Berger
and Humphrey (1992), Barr and Siems (1994), DeYoung and Whalen (1994), Wheelock and
Wilson (1994)), because banks dont optimise their portfolio decisions by lending less than
demanded. Whats more, there are evidences that even among banks that do not fail, there is a
negative relationship between the non-performing loans and performance efficiency (Kwan and
Eisenbeis 1994, Hughes and Moon 1995, Resti 1995 ).
The phenomena that banks are reluctant to take new risks and commit new loans is described as
the credit crunch problem. According to the United States Council of Economic Advisors
(1991), credit crunch is a situation in which the supply of credit is restricted below the range
usually identified with prevailing market interest rates and the profitability of investment
projects. A credit crunch is a disequilibrium phenomenon. It is present when banks are
unwilling to lend, especially when a firm with profitable projects cannot obtain credit in spite of
low interest rates (lower than the expected marginal products). Credit crunch results in excess
demand for credit and hence credit rationing, where loans are allocated via non-price
mechanism. Eventually, it imposes additional pressure on the performance of the monetary
policy.
The idea of credit crunch has drawn attention when the traditional view failed to satisfactorily
explain the economy state for those countries that suffered from the South-East Asian financial
crisis in 1997. Under the traditional view, the link between the interest rate change and the real
economic activity occurs through investment and consumer durable expenditure. In response to
the currency crisis in 1997, the interest rate was raised. It was strongly believed by IMF that the
hike would help stabilise the foreign currency market and eventually induce banking reform by
crowding out low-profit projects. However, the persistent fall in economic growth rate and the
lasting economic recession cast doubt on the true benefits of the policy and the effectiveness of
the traditional view of the transmission mechanism. The idea of credit crunch addresses an
alternative explanation for the transmission mechanism.
During a crisis, in order to restore the credibility among creditors and depositors, failing financial
institutions not only try to expand their equity bases, but also reduce their risky assets or change
the composition of the assets portfolio. As a result of such defensive action, the corporate debtors
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are always targeted, thus stalling the overall economic growth.
Specially, the reluctance of banks to lend can be caused by several reasons, such as the increased
capital adequacy requirement imposed by Basel Accords; impaired debt-servicing capacity,
especially small-to-medium enterprises (SMEs); risks of a further fall in collateral value, etc.,
which make the interest rate not to serve as the main determinant by banks in credit approval.
Non-performing loans have been viewed to constitute one of the most important factors causing
reluctance for the banks to provide credit. In a high NPL condition, banks increasingly tend to
carry out internal consolidation to improve the asset quality rather than distributing credit. Also,
the high level of NPLs requires banks to raise provision for loan loss that decreases the banks
revenue and reduces the funds for new lending. The cutback of loans impairs the corporate sector
as they have difficulties in expanding their working capital, blocking their chances of resuming
normal operation or growing. Unavailability of credit to finance firms working capitals and
investments might trigger the second round business failure which in turn exacerbates the quality
of bank loans, resulting in a re-emerging of banking or financial failure. In a worse case, it
triggers an endless vicious liquidity spiral: As a result of poor economic condition and the
depressed economic growth, the level of NPLs increases the weaker corporate sector makes
banks more reluctant to provide additional credits with insufficient capital, the production sector
is further weakened, resulting in decreases in aggregate demand again, even worse borrowers
condition creates more NPLs.
Krueger and Tornell (1999) support the credit crunch view and attribute the credit crunch in
Mexico after the 1995 crisis partially to the bad loans. They point out that banks were burdened
with credits of negative real value, thereby reducing the capacity of the banks in providing fresh
fund for new projects. Agung et. al. (2001) using the macro and micro panel data analyses to
study the existence of a credit crunch in Indonesia after the crisis. Both the macro and micro
evidences show that there was a credit crunch, characterised by an excess demand for loans,
starting to emerge in August 1997, one month after the contagion effects of the exchange rate
turmoil in Thailand spreading to Indonesia. They investigate the relationship between the loan
supply and real lending capacity, lending rates, real output, banks capital ratio, and nonperforming loan. The results show that the coefficients on NPLs are negative and significant,
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which indicate that bank credit supply declines with the worsening of the NPLs problem.
Westermann (2003) compares the cases of Germany after the credit boom of the late 1990s and
Japan aftermath the bubble burst in early 1990s. He argues that even though the German banks
were in a better condition than Japanese banks were, as the path of Germans aggregate credit
looks so similar to that of Japan, it is at least unlikely that the German credit slowdown was
entirely driven by demand, while that of Japan was mostly caused by a lack of supply. There
must at least be some supply side changes that affect the aggregate credit, and differences only
exist in the magnitude of the problem. He further points out that the one of the main reasons in
Germany for the credit crunch is the increased risk of non-performing loans after the credit
boom.
2.4 Strategies of dealing with non-performing loans
According to Wanjira (2010) there is a positive relationship between non-performing loans
management practices and the financial performance of commercial banks which implies that
adoption of non-performing loans management practices leads to improved financial
performance of commercial banks and thus banks should manage the levels of the NonPerforming Loans. There are several strategies that could be used by banks and for the purpose
of this study the researcher has chosen the most used strategies.
2.4.1 Ways to deal with non-performing loans at individual bank level
Guo Ning-nigs five steps
Guo Ning-ning (2007) put forward suggestions on how to solve the NPLs problems in Chinese
commercial banks. He brought forward the five basic principles to solve the NPLs problems in
Chinese commercial banks, based on an in-depth analysis of the reasons and systematic root of
formation of NPLs.
Firstly was improving governance structure and construct a healthy and responsible Board of
Directors, which is the core part of western corporate governance, Set up Audit Committee, Risk
Management Committee, Remuneration Committee, and Nomination Committee to make sure
all things are carried forward.
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The second step was to establish scientific and clear business development strategy and risk
management strategy adjust and improve the strategies according to the changing situation to
make sure the implementation of strategies and plans.
Guo Ning-ning also suggested that there is need to finalize a whole set of complete motivation
and constraint mechanism, through enhancing monitoring, assessment, accountability and
remuneration mechanism and to improve credit decision mechanism to control the quality of
newly issued credit asset under reasonable level.
Ahmed (2006) agrees with Guo Ning-ning (2007) that when dealing with NPLs a centralized,
specialized and scientific management is the inevitable trend. They argued that decentralized
management is one of the major reasons of formation of NPL according to the above analysis. So
it is necessary to change the decentralized management to the centralized one controlled by the
head office of banks.
Establishment of professional teams is the essential guarantee which (GUO Ning-ning) also
highlighted for the elimination of NPLs. The management and credit personnel should have not
only the favorable moral ethics, but also enough professional knowledge, skills and experience to
solve problems to analyze and judge the strategic location and credit business correctly, and
solve the existing problems suitably. Morgan Stanley (2013) estimates that Europes banks need
to sell or refinance 700 billion of NPLs to meet regulatory capital requirements, deleverage
their balance sheets and achieve other goals. As of January 2013, banks had sold or refinanced
NPLs equal to 20% to 25% of that target.
Davis (2013)s steps
Davis (2013) suggested the ways of dealing with NPLs at bank level using the following steps
which are quantifying the problem, managing the problem, targeted high-touch servicing,
distressed asset sales and modifying future lending decisions.
Management has to identify and quantify the issue in some cases before the loan becomes
distressed. One way to do this is to measure areas (and loans) that have likely experienced
significant losses in collateral values. Once these loans are identified, institutions can measure
layered risk against them in order to predict the likelihood of future default. Any loans with
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higher loss exposure and higher loss expectancy should be treated differently prior to
foreclosure. This is crucial to managing the potential losses embedded in the loan portfolio.
Mehta (2009) supported Davis in that institutions also must be proactive in managing the loans
that are already distressed.
Jacobs (2012) argues that some loans can be resolved more cost effectively by removing them
from the existing servicing system and placing them with a specialty high-touch servicer which
agrees with Davis view of reducing NPLs . Institutions should evaluate the merits of this type of
solution. It is often found that certain negative equity loans can be more efficiently managed
using an intensive servicing program.
Debt Restructuring
According to Chaturvedi (2012) debt restructuring is basically a mechanism by way of which
company endeavors to reorganize its outstanding obligations. The reorganization of the
outstanding obligations can be made by increasing the tenure of the loan, reducing the rate of
interest, one time settlement, conversion of debt into equity, converting subserviced portion of
interest into term loan. He further reveals that Non-performing loans may be resolved through
restructuring because by way of restructuring there is a hope of preservation of viable corporate
that are affected by certain internal and external factors restructuring aims at minimizing the
losses to creditors and other stakeholders through an orderly and coordinated restructuring
program. Loan restructuring is where the terms of the loan agreement regarding interest and
principal are renegotiated or rescheduled after comparative analysis on the previous performance
of the loan (Basel Committee 2003).
Micuci and Rossi (2010) asserted that debt restructuring may preserve the ongoing concern of
firms facing financial distress but which still have profitable investment projects. It is a complex
bargaining process which involves the firm and its lenders. When a borrower faces financial
distress, the lender bank has to decide whether to take part in the workout process or not. In
tandem restructuring can help preserve the business value of debtor enterprises and the interests
of other stakeholders, to the benefit of the creditors as a whole. Debt restructuring can either be
formal or informal.
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Garrido (2011) noted some advantages of using Informal restructuring which include flexibility
and ease of adaptation to the specific needs of the debtors business, ease of negotiation, speed of
settlement, high levels of confidentiality, possible continuation of the debtors business and less
stigma in comparison with the formal restructuring. He further explains that the informal
restructuring has its own short comings which include difficulties in assessing the real financial
and economic situation of the debtor, lack of punishment in cases of fraudulent behaviour and
difficulties in solving multi-party arrangements.
Gilson et al (1990) noted the connection between informal and formal workouts since he
believed that a firm that must restructure the terms of its debt contracts to remedy or avoid
default is faced with two choices; it can either file for bankruptcy or attempt or renegotiate with
its creditors privately in a workout. The alternatives are similar in that relief from default is
obtained when creditors consent to exchange their impaired claims for new securities in the firm.
Sometimes this exchange is implicit, as when the terms of a debt contract are modified. If
bankruptcy is the alternative to private renegotiation, then firms incentives to settle with
creditors out of court, and the settlement terms, will reflect the legal and institutional constraints
of the bankruptcy process.
2.4.2 Ways to deal with non-performing loans at National level
Many Asian economies have set up resolution agencies as the preferred tool for handling
distressed debts in their financial systems, especially after the Asian financial crisis. While
there has been a large body of literature on emerging Asias experiences of using asset
management companies to resolve bad debts (Lindgren et al. (1999), Claessens et al. (2001),
Fung et al. (2004).
ARCs according to Mehta (2009) provide an efficient mechanism to banks for dealing with their
accumulated NPLs. With the enactment of the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) the
concept of ARCs came into formal existence, finally making way for an alternate means of
redressal to litigation. To qualify as an ARC, a company must fulfill the eligibility criteria laid
down under the SARFAESI Act 4 and 3 must be registered with the Reserve bank of India
(RBI). The SARFAESI Act regulates the transfer of NPLs from banks to ARCs as well as the
enforcement of security interests.
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ARCs acquire NPLs from banks and financial institutions and manage them with a view to
recover and liquidate the loans in default. Under the SARFAESI Act, an ARC can acquire NPLs
from any bank or financial institution by either by issuing a debenture or bond or any other
security in the nature of debenture, for a consideration agreed between them (on agreed terms
and conditions), or by entering into an agreement with such bank or financial institution
for the transfer of such financial assets to such company on agreed terms and conditions.
Securitization
Securitization is one of the processes to eliminate NPLs. According to Miyazaki (1994)
securitization is the process of converting loans or receivables into negotiable instruments. It
enables non-tradable assets that range in marketability, credit-worthiness, and size to become
liquid secondary instruments through repackaging, bearing credit enhancements, and cash flow
structuring. Many have shown the empirical benefits of loan sales via securitization, and the
salutary effects it has on the availability of banking capital. Greenbaum and Thakor (1987)
demonstrated that the signaling of information regarding loan quality may be enhanced when
loans are sold rather than funded by deposits. James (1987) demonstrates that loan sales can
provide lower cost financing for bank equity-holders and enable the bank to avoid a possible
underinvestment problem when it has risky debt outstanding. There are two forms of securitized
products according to Miyazaki (1994) which are Asset- Backed Securities (ABS) and
Mortgage-Backed Securities (MBS). They are similar in structure, but collateralized by different
underlying assets. An ABS securitizes cash collateral, such as credit card receivables, auto loans,
home equity credit lines, student loans - essentially any asset with a cash stream. An MBS
predominantly securitizes immobile objects such as real estate, commercial buildings, and
residential homes.
Use of asset Management Companies
World Finance Review Journal (2011) asserts that it is much more effective to centralize the
management of non-performing loans through such systems as asset management. The
government may form such an institution and all NPLs handed over to the asset manager will be
on the back of government guaranteed paper.
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Calice (2012) believes that a coordinated private sector approach is the most effective and
efficient resolution strategy. Coordination among all the stakeholders involved is of the essence
in a market based asset management strategy. For one thing, the private sector is not likely to
jumpstart a NPL market. More importantly, a private AMC requires a conducive legal and
regulatory framework, which in turn might require some reforms. In this context, international
financial institutions (IFIs) can play a facilitating role, serving as honest brokers and providing
advisory, technical assistance and financing.
Inoguchi (2012) asserts that historically, many countries have turned to AMCs as a central
strategy for solving the problem of bank bad loans. Country experiences point to various
institutional arrangements for NPL resolution through asset management companies. AMCs can
be either publicly- or privately-owned, with a number of intermediate solutions. Each model has
its own rewards and shortcomings, and there is no one-size-fits-all approach .For example, a
centralized AMC is usually effective when the extent of the NPL problem is systemic and the
legal infrastructure for debt resolution is relatively weak. Private AMCs possess greater
managerial flexibility than public AMCs, and for this reason they may be more effective when
the extent of industry problems is limited or concentrated and the legal and regulatory framework
is relatively developed.
Litigation
According to Madhuku (2010) the litigation process takes a multi faceted approach. Most civil
claims start by the issue of a letter of demand by the plaintiff (creditor) and the courts will serve
summons to the defendant (debtor). Should the defendant disagree with the plaintiffs claim
he/she can enter an appearance to defend. The request for further particulars, defendants plea,
replication and close of pleadings follow are done before the discovery process. A pre-trial
conference is held after the discovery and is meant to define issues and possibly reach an
agreement earlier. If any of the parties decide to continue with the trial a trial date is set. The
courts give their judgment at the end of the trial. Judgment can be either execution of the
debtors property, enforce a garnishee order, or civil imprisonment.
According to lbid (2000) timely repayment of loan is important to endure the financial soundness
of lender where borrowers are in default, lenders may reschedule loans, or employ other various
techniques but ultimately they rely on recovery procedures and the courts to compel borrowers to
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pay up. If the courts and the judicial system in a country fail the lenders, non-performing loans
will continue mounting. Therefore for litigation to be effective there should be sound judicial
systems in place.
2.5 Challenges faced by commercial banks when managing Non-performing loans
Chakraborty (2005) stated that banks face several challenges in managing Non-Performing
Loans. He further argued that despite the availability of various avenues of recovery the mindset
of the borrowers from the beginning should be tuned in such a way that he is willing to repay
rather than turn into a willful defaulter
Legal framework
Xu (2005) stated that Korea, Thailand, and Japans experiences demonstrate that a key factor to
succeeding in NPL recovery is a transparent and user-friendly insolvency law framework that
gives creditors adequate protection. All of these countries have made significant improvements
and/or additions to their bankruptcy and securitization legislations over the last nine years. The
resolution of NPL in any country requires both strong legal and financial frame work.
Appropriate legislation alone would not create an environment conducive to business activities.
Laws are only as good as the institutions that enforce them. It is vital therefore; the courts and
other organs responsible for enforcing the laws and resolving disputes to fully engage with
lending financial institution (Blaz 1996)
According to Coase (1998), if the business laws of a country are not market friendly and the law
enforcement agencies are inefficient, business costs such as transaction costs to arrange, monitor
and enforce contracts would be high. Litigation costs would inevitably rise. Where inefficiency
exists, uncertainty prevails, and in such an environment prudent decision making, which is vital
to business activities would be difficult.
Debt recovery through courts has been the usual practice in different countries but due to the
complex procedure and to minimize judicial process, most countries gave banks the right to
recover loans by themselves. This process looks easier when the loan is securitized. The recovery
of loans by banks provides for the management or sale of mortgaged property by banks without a
court order (Brown 2004).It is also important to note that that the recovery process through legal
system with or without collateral is equally costly and lengthy. The court fee is payable on the
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amount of default or on the amount to be recovered and not on the value of the security (Ayewel
2001).
Moral Hazard and Information Asymmetry
Moral hazard (or adverse incentives) is a concept with relevance to a variety of principal agent
relationships characterized by asymmetric information (Brownbridge 1998). In some cases,
lending proposals are not supported with financial data and in a situation where these financial
data are available; they have been deliberately falsified to satisfy the loan officer. In some cases,
proposals with inherent defects are made by highly reputable individuals within the society,
which are approved by the credit officer because of other non-banking considerations. With the
apparent defects in such credits, the risks are high and the chances of recovery are remote
(Ahmed, 2006).The problem of information asymmetry inhibits the successful management of
NPLs by various financial institutions.
Role of internal and external parties in debt recovery
Agarwal (1991) believed that to ensure effective follow up and timely repayment, organizational
set up and systems, the quality of existing credit portfolio, the organizational culture and the
public image of banks need improvement. Credit recovery seminars would have to be organized
with an aim of changing beliefs, attitudes and behavior of officers at various levels of
management. This is because there are multi-parties involved in the debt recovery process. A
clear process hence needs to be clearly defined in order for these parties to work in tandem with
the goal of loan recovery.
Lack of collateral
According to McNaughton, (1996), collateral is a tangible asset in which a bank takes securing
interest. Such security should be safe and easily marketable. This may include land titles, houses,
balances on savings accounts and guarantees. Security takes many forms, but can usually be
categorized in one of two ways. First, it may be either direct (provided by the borrower) or
indirect (provided by a third party). A charge by deed by way of legal mortgage creates a direct,
and either legal or equitable, claim over the asset or class of assets referred to in the deed, subject
to the mortgagers right to the equity of redemption (that is, to redeem the mortgage by
repayment) In realizing the mortgage property, one of the main things to be handled by the bank
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is fixing the value of the asset to be sold by auction. Developing countries the substantive law as
well as the procedural law is silent about the criteria to be followed by banks in fixing the price
of the asset to be auctioned (European Mortgage Securitization: guide 2002) . Sometimes
however the security held by banks is not sufficient to fully cover the loan principal and interest
repayments.
2.6 Factors to promote effective management of non-performing loans
There are a number of factors which promote the management of non-performing loans which
the commercial banks and government can engage in.
Chikoko et al (2012) pointed the need to upgrade Information, Communication and Technology
(ICT) in order to be able to implement models that will mitigate risks arising out of the
environmental changes. They also highlighted the factors that promote the effective management
of NPLs. They noted that there is need for urgently setting up of a credit bureau that will
facilitate the dissemination of credit information. Credit analysts have to be trained in credit
intelligence to equip them with adequate and efficient skills in loan management.
Sirtaine (2011) also suggested the factors that promote the effective management of nonperforming loans. Firstly she pointed out the need to establish a conducive legal framework. This
would be enhanced by simplifying procedures for collateral enforcement and encourage use of
small claims procedures when applicable. Also she highlighted the need to increase efficiency of
insolvency proceedings and institutions. Moreover, Sirtaine also highlighted the issue of
established avenues for going-concern corporate rehabilitation and debt restructuring including
fast-track court approval. This would enhance, as needed, the individual insolvency framework,
encourage efficiency of justice system, out-of-court debt restructuring, developing guidelines for
out-of-court debt restructuring, conduct information campaigns, removal of tax obstacles to
ensure debt relief does not attract income tax and to ensure adequate tax recognition of
restructuring losses as well as supportive participation of tax authorities in debt restructuring
negotiations Jacobs (2012) agrees with Sirtaine on the need to remove regulatory constraints thus
obstacles on taking control of collateral and corporate assets, obstacles to debt-equity conversion,
obstacles to establishment of SPV for impaired asset management. She also pointed out on the
need to ensure asset classification and provisioning requirements incentivize proper debt
resolution, enhancing consumer awareness through preparation of guidelines / leaflets for
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consumers facing payment difficulties, enhancing the role of consumer protection centers,
considering the introduction of debt counseling services
Moreover Commercial banks have to come up with strategies that clearly define how different
types of loans at different stages are dealt with. Supervisors should come up with devices that
would enforce commercial banks to adhere to prudential guidelines. In cases of importers,
commercial banks should ensure that documents are in place before making payments through
swift. Clients have tendencies to misrepresent and then divert the funds to other uses.
Conventional banks may adopt the Bai (meaning buy and sale) mechanism from Islamic banking
whereby the bank purchases goods and services on behalf of the clients and sell the goods and
services to them. Conventional banking believes in funding directly which is difficult to look
after the ultimate fund.
However, Ahmed (2006) argues that for the successful implementation of the strategies that
solve NPLs there is need for the development of capital markets-not only to serve as alternative
financing sources, but also to enhance the competitive environment in the financial sector as a
whole. He also noted that there is need for improvement of corporate governance of banks
thereby strengthening institutional aspects of banking operations to achieve enhanced efficiency,
transparency, and accountability.
2.7 Empirical Evidence of non-performing loans
Various studies and conclusions were carried out by different scholars on issues pertaining to
non-performing loans, their causes, types and how to deal with them. Keeton and Morris (1987)
present one of the earliest studies to examine the causes of NPLs. In their paper the authors
examined the losses by 2,470 insured commercial banks in the United States (US) over the 197985. Using NPLs net of charge-offs as the primary measure of loan losses Keeton and Morris
shows that local economic conditions along with the poor performance of certain sectors explain
the variation in loan losses recorded by the banks. The study also reports that commercial banks
with greater risk appetite tend to record higher losses.
Moreover Sinkey and Greenwalt in their study (1991) reported that depressed regional economic
conditions also explain the loss-rate of the commercial banks. The study employs a simple loglinear regression model and data of large commercial banks in the United States from 1984 to
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1987. Keeton (1999) uses data from 1982 to 1996 and a vector auto regression model to analyze
the impact of credit growth and loan delinquencies in the US. It reports evidence of a strong
relationship between credit growth and impaired assets. Specifically, Keeton shows that rapid
credit growth, which was associated with lower credit standards, contributed to higher loan
losses in certain states in the US. In this study loan delinquency was defined as loans which are
overdue for more than 90 days or does not accrue interest.
Importance of Non-Performing Loans Management Strategies, a case of Kenya
As most developing countries that have undergone financial liberalization, Kenya was faced with
the problem of Non-Performing loans. This affected severely the efficient running of the
financial sector of the economy. Wanjira (2010) conducted a research on the relationship
between the levels financial performance of banks and the NPL management strategies that were
adopted.
In her research she concluded that there is a need for commercial bank to adopt non-performing
loans management practices such as; ensuring sufficient collaterals, limiting lending to various
kinds of businesses, loan securitization, ensuring clear assessment framework of lending
facilities and use of procedures in solving on problematic loans among others. It was further
revealed that there was a positive relationship between non-performing loans management
practices and the financial performance of commercial banks in Kenya which implies that
adoption of nonperforming loans management practices leads to improved financial performance
of commercial banks in Kenya.
Asset management companies, a case of Malaysia
After the 1997 Asian financial crisis, the number of Non-Performing Loans in Malaysia
expanded in the aftermath of the crisis. Ponnu and Ramakrishnan (2011) explored the factors that
contributed to the reduction of Non-Performing Loans in the country. In addition, it also aims to
evaluate the effectiveness of Danaharta, Malaysia's national asset management company, in
addressing the NPL problem in banking institutions of Malaysia.
The trend of gross NPL ratios and percentage of total loan provisions, the ageing of NPLs and
the percentage of NPLs restructured and disposed were some of the indicators used on the
secondary data collected from Bank Negara Malaysia and Danaharta. Results show that the level
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of NPLs has declined since the 19971998 crisis. The study also used secondary data obtained
from various issues of BNM Annual Reports, BNM Monthly and Quarterly Statistical Bulletins
and Danaharta's Annual and Operations Report. To determine how effective Danaharta was in
recovering the loans, the percentage of assets resolved to total assets transferred to the AMC was
used to measure what proportion of the NPLs had been dealt with rather than being parked in the
AMC.
The results from his research suggest that the purchase of loans by public asset management
companies Danaharta was successful in reducing the level of NPLs in banking institutions and
has managed to restructure all the NPLs in its portfolio in a year since its acquisition of NPLs
due to the large size and concentration of borrowers and the nature of collaterals which was
mostly real estate based.
Debt Restructuring, a case of Thailand
In an effort to ensure that creditors recovered some of their Non-Performing Loans the Thai
authorities used a number of strategies and established special entities that coordinated debt
restructuring.
In a case study conducted by Dasri (2003), on the Thai economy To manage the Non-Performing
Loans the Thai House of Representatives and Senate amended the Bankruptcy act and this
refined and strengthened the principles. This had an effect resolving the issues of small creditors.
Regarding the informal debt restructuring frameworks and institutions to tackle the problems
were established. The main institutions that facilitate informal workouts include the Bank of
Thailand, the Corporate Debt Restructuring Advisory Committee and the Court Mediation
Centre.
In the study it was discovered that the joint efforts of debt restructuring made by means of the
court process and the market oriented out of court processes contributed significantly to the
resolution of Non- Performing Loans in Thailand. Thailands outstanding loans of about 3million
baht were restructured successfully between the period 1998 and September 2003. The concerted
efforts of debt restructuring (both formal and informal) were key factors contributing to the
progress in Non-Performing Loans resolution in Thailand. The NPL level in the Thai financial
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system declined from 47,70% of total loans in May 1991 to 15,13% by September 2003 and this
further declined to 12,74% by December 2003..
2.7.1 Non-performing loans in Zimbabwe
According to the International Monetary Fund (2012), non-performing loans in Zimbabwe
increased from 6 percent on average at end-December 2011 to 10 percent at end-June 2012. This
is higher than the prudential threshold of 5 percent stipulated in Basel II (Basel, 2004). Nonperforming loans could rise further with the ongoing deceleration in economic activity. More
over our banks recently failed in Zimbabwe. In June 2011, Renaissance Merchant Bank was
placed under 6-month curatorship after the RBZs audit revealed an inappropriate shareholding
structure, chronic undercapitalization and liquidity challenges, high level of nonperforming
insider and related party exposures, persistent losses, and corporate governance and internal
control deficiencies. The curatorship was lifted in March 2012, following a cash injection by the
National Social Security Authority, which acquired 84% share in the holding company and
installed new management. Interfin Bank Limited was placed under recuperative curatorship on
June 11, 2012, after a RBZ audit determined that it was operating in an unsound and unsafe
manner involving: inadequate capitalization; concentrated shareholding; abuse of corporate
structures; high level of nonperforming insider and related party loan exposures; chronic
liquidity; income generating challenges; weak governance and management oversight, and
violation of banking laws and regulations.
Genesis Investment Bank voluntarily surrendered its banking license to the RBZ in June 2012,
after failing to realize adequate financing from partners that the bank had been courting since
2009. The RBZ commenced the modalities on liquidating the bank. On July 27, 2012, Royal
Bank Zimbabwe Limited surrendered its banking license to the RBZ. Onsite inspection by the
RBZ determined that the bank was critically undercapitalized, faced chronic liquidity challenges
and liabilities to the RTGS system, had high non-performing insider loans, and had been
misrepresenting information to the RBZ.
In its financial results for the half year ended June 30 2013, NMBs total non-performing loans
were at US$41 977 499 from US$23 996 312 recorded in December 2012, raising fears the bank
was not aggressive enough in collecting money from clients. NMB Holdings saw its non32 | P a g e
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performing loans almost doubling to 22.8% in the first half of the year, reflecting the stagnation
and the liquidity problems facing the economy.
Figure 2.1 : Causes of rise in non-performing loans 2013
Source: Bank Licensing, Supervision and surveillance, RBZ Annual Report 2013
According to Bank Licensing, Supervision and surveillance, Annual report (2013) the increased
exposure to credit risk is attributable to the challenging operating environment that has
characterized the multicurrency era
and has also been
linked to the absence of a credit
referencing system to facilitate sharing of credit information resulting in high levels of

indebtedness among borrowers.
The diagram below shows an upward trend in non- performing loans in Zimbabwe from
December 2009 to September 2014
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Figure:2.2 Non-Performing loans in Zimbabwe
SOURCE: Zimbabwe Stock Exchange: Quarterly Industrial Report September (2014)

According to Zimbabwe 2014 Quarterly Industrial report liquidity and credit risk remain the
major challenges facing the banking sector. A total of 13 banks out of the 20 operating banking
institutions recorded profits. The losses recorded by the other seven banking institutions are
attributed to high levels of non- performing loans and lack of critical mass to generate sufficient
revenue to cover high operating expenses. The average non-performing loans to total loans ratio
was 20.45% as at 30 September 2014.
The level of non-performing loans in Zimbabwe is increasing. Banks are likely to face
difficulties when there is a slight deterioration in the quality of loans. The economic challenges
have impaired borrowers especially for workers most of whom have received loans based on
their salaries. Non-performing loans has been increasing by the use of moral suasion as loans end
up being given to people who have a high potential of default and as such, authorities must not
interfere with the lending portfolio of the banks. In the wake of the distressing operating
environment, banks are thus supposed to put in place sound credit risk management systems with
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policy and guide lines that outline the scope and allocation of credit and to effectively screen
borrowers (Derban2005).
In an effort to address the problem of NPLs, the Reserve Bank in collaboration with
the Ministry of Finance, has established an asset management company (Zimbabwe Asset
Management Company (ZAMCO)) which will buy non-performing loans from financial
institutions.
2.8 Conclusion
The chapter managed to highlight the various literature and empirical evidence on the different
NPL management techniques used by commercial banks. This chapter also managed to address
effects of NPLs , the strategies of dealing with non-performing loans at individual bank level
and
at
national level and also outlined various challenges by banks in managing
NPL
portfolios. In the next chapter the researcher looks at the methodology of the study.
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CHAPTER THREE
RESEARCH METHODOLOGY
3.0 Introduction
This chapter articulates the methodology employed to achieve research objectives and answer
questions in a balanced and consistent manner. Primary and secondary data collection methods
are research methodologies employed. Moreover various techniques under these methodologies
utilized and the justifications for their use, and the challenges met and how they were managed is
described. It describes the method of data collection, contact methods, the instruments used and
the sampling procedure as well as the administration of the instruments used. The chapter
concludes with data analysis and presentation.
3.1 Research approach
Saunders et al. (2008) view deduction and induction as the two major approaches used when
drawing research conclusions. According to Bryman (2009), the deductive approach is
principally oriented towards the testing of existing theory in quantitative research, and as such
theory guides research.
On the other hand, qualitative research, which predominantly
emphasises an inductive approach to the relationship between theory and research, is oriented
towards generating theories and as such, theory is an outcome of research. Sanders et al. (2008),
asserts that the choice of research approach to adopt in any study is a matter of practical
considerations based on the nature of the research topic. They recommend a deductive approach
to be used for a topic that has abundant existing literature from which to define a conceptual
framework and hypotheses. Conversely, where a research topic is new and literature is scarce,
the inductive approach will be more appropriate for use in a study. This study was based on an
inductive approach since there is a scarcity of Zimbabwean literature on ways to deal with nonperforming loans affecting commercial banks.
3.2 Research paradigm
The proposed study will be based on a pragmatic philosophy. The pragmatic approach allows the
mixing different philosophical viewpoints within one study and ultimately applying a mixed
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research approach and mixed methods (Armitage, 2007).This explain why the study proposes to
use a methodological triangulation of questioners and documents analysis.
Although this study follows a mixed methods research approach, it will adopt the
phenomenology as its dominant paradigm. The decision to predominantly ground the study on
phenomenology is informed by the views of Saunders et al. (2008) who argue that the
phenomenological research approach is useable where the subject is relatively new and when
previous studies in the area are limited .
This study conforms to this reasoning since it deals with a subject which is thinly covered in
literature locally. The proposed peripheral application of positivism stems from the fact that, in
the positivist tradition emphasis is placed upon search for objectivity, generalization and
prediction. Saunders et al. (2008) argue that a researcher should select a positivist approach if
there exist extensive literature within the problem area. It was noted in the background section
that that there is limited published literature in Zimbabwe on ways to deal with NPLs.
However, one of the main drawbacks of phenomenology is its emphasis on subjectivity,
description and interpretation as opposed to the emphasis on objectivity analysis and
measurement (Denscombe, 1998). Phenomenological studies are also not good at addressing
cause-effect research questions. The decision to employ mixed methods research was therefore
influenced by the need to minimize the effects of the shortcomings of phenomenology on the
quality of the study.
The positivist approach will be used in a secondary manner in when questionnaires are used to
complement qualitative data gathering methods. This is influenced by the need to give the study
the scientific rigour associated with the objective nature of positivist research and neutralize the
shortcomings stemming from the subjective nature of phenomenology. Positivists believe that
reality is stable and can be observed and described from an objective viewpoint (Levin, 1988),
i.e. without interfering with the phenomena being studied. They contend that phenomena should
be isolated and that observations should be repeatable.
3.3 Research Design
Research design is described by Emmanuel in University of Zimbabwe EA3DC 101 Module
(1993) as methods raised to collect information for a study. Moreover, Kumar et al (1999)
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described a research design as a detailed blue-print used to guide the research study towards its
objectives. Greenwood and Mayer (199) described research as an investigation or inquiry
undertaken with the aid of standardized procedures in order to obtain information. The procedure
in data collection must be orderly, systematic and repeatable to verify the information. On the
other hand ,Kaplan (1973:93) says the aim of methodology is to describe and analyze methods,
throwing light to their limitations and resources clarifying their suppositions and consequences.
The researcher adopted descriptive approach in collecting the data. Descriptive research was
used for this study because it focused on bringing out clear explanation on the strategies of
dealing with non-performing loans and emphasized on words rather than numbers. Both
qualitative and quantitative research design were also used with much emphasis on
qualitative research design due to the subjective nature of the subject.
3.3.1 Population
Kumar et al (1999) defined a population as the aggregate of individual units or elements of
analysis from which a study sample is actually chosen. The population is made up of 13
registered commercial banks in Zimbabwe as at March 2015.
The target population of the study were commercial banks which constituted the major players in
terms of lending in Zimbabwe. These were taken to represent the entire financial system of
Zimbabwe. Twelve questionnaires were used to gather primary data in all commercial banks
which were currently present. All aspects on NPLs were covered and highest accuracy was
obtained, thus, resulted in reliable inferences to the area of study, conclusions and
recommendations were drawn. The researcher considered this sample size as optimum that is,
one that fulfills the requirements of efficiency, representativeness, reliability and flexibility.
3.3.2 Sampling technique
A sample is a small proportion of the population selected for analysis. Bes et al (1993) was of
the view that a small sample unit can also be described as the item or individual being measured
or counted with respect to random variables under study.
The researcher conducted a census on twelve commercial banks in Zimbabwe owing to the fact
that there are only thirteen commercial banks within the country. This was done to ensure that
the information on defaulting loans of all banks was taken into consideration. From each of these
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banks, a credit officer or a manager was selected using judgmental sampling which is a nonprobability sampling method. The credit officer or manager was then asked to respond to a
questionnaire. The researcher chose those respondents which he felt served the research
purpose.
The researcher used judgmental sampling on the credit officers and managers since the
selection of the sampling units was consciously shaped by the research agenda. The basis of the
target population was based on the subjective instinct that those members will represent the
entire group. This sampling technique was used because it is convenient, fast and
relatively cheaper and conclusive judgments could be made on the work under the study
3.4 Data collection instruments
The research involved the collection and analysis of both primary and secondary data
material. Primary data was that collected by the researcher specifically for this research. The
latter data was used to complement the findings from the primary data sources and is data
collected from other sources which are secondary to this particular research.
3.4.1 Primary sources
According to Gender (1999), primary data can be defined as data which is collected directly from
target respondents. Structured questionnaires were used in the primary data collection. Structured
questionnaires were used to get the unbiased opinion of respondents, the interviews were
used for clarifications of some unclear issues such as factors that account for high bad
loans in agriculture sector, how poor credit appraisal result in bad loans among others.
These data collection instruments made it very convenient for respondents to give the data
needed for the analysis.
3.4.1.0 Questionnaires
Sekaran (2000) defined questionnaire as a set of questions put in writing and then send to various
respondents for answering in the researchers absence. Bush et al. (2003) defines a questionnaire
as a framework consisting of a set of questions and scales designed to generate primary data. The
researcher used both closed and open-ended questions. Doyle (2003) defines questionnaire as set
of questions that are used to draw conclusion and to collect data. Thus, it is a method of
obtaining specific information about a refined problem. The logic behind using a questionnaire in
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research is to find out what the selected group of participants do, think or feel (Wellman and
Kruger, 2001). The researcher used closed-ended questions with an open ended option in
some of the questions. This gave the respondents a chance to express their views were
possible by the way of an option which required them to specify if there were other responses
than the ones which were given. The use of closed ended questions made it easy to quantify and
analyse data. Open ended questions were also used to compliment closed ended question and
they allowed the respondents to give detailed information in their own expressions. To avoid bias
the questions were clear and precise.
3.4.1.1 Administration of Questionnaires
Since the purpose of the study was to find ways of dealing with non-performing loans affecting
Zimbabwe commercial banks, questionnaires were administered to find out if there are any
strategies employed by banks to mitigate problem of non-performing loans. The questionnaires
also were used to find out causes of non-performing loans, challenges which banks face in
dealing with non-performing loans and what can be done at national and individual bank level to
reduce level of NPLs. Questionnaires were used to obtain information from top management,
credit analysts ,supervisors and other employees who could not be met in person.
The questionnaires were delivered to the respondents personally in Harare and Bulawayo. The
respondents were given adequate time to answer the questionnaires as they were left for a few
days with them so that they could not answer under pressure as they had their own
work demands.
3.4.2 Secondary Data Collection Methods
The findings from primary data sources were complemented by secondary data. According
to Kotler (2003), secondary data is information that already exists which has been collected for
another purpose.
The secondary data were sourced from the published annual reports and financial statements of
the banks. The information covered a period of five years from 2009 to 2014. This category of
data was mainly in quantitative form. Access to the data was not a problem as these were
published annually and could easily access them on internet.
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The researcher benefited in so many ways from the use of this type of information for the study.
Firstly, this was less expensive to collect, in terms of time and money. It afforded the researcher
the opportunity to collect high quality data which would not have been of the same quality if the
researcher were to collect it in its primary form.
The chief benefit of their use was that they presented analyzed data. Usage of such material was
easy to incorporate into the context of the study. In most instances, data had already been
presented in tables and other presentation techniques that could also be adapted for present
usage. Additionally, their usage was employed in questionnaire development and interview
structuring.
More-over it was the quickest and most economical way to find solutions to research questions.
It also provided information which the author could not obtain from primary source.
However there were also disadvantages associated with the use of secondary data which are: The
information did not satisfy immediate needs because the data had been compiled for another
purpose. Secondly variation in units of measurement and date data collected was a common
deficiency and the researcher had to determine whether the information was accurate enough for
the purpose of the study
3.4.3 Administration of the instruments
The questionnaires were delivered to the respondents personally. The questionnaires were
physically distributed by the researcher within the city of Bulawayo and Harare. The respondents
were given adequate time to answer the questionnaires as they were left for a few days with
them so that they could not answer under pressure as they had their own work demands.
3.5 Pilot study
It refers to feasibility studies which are small scale versions or trial runs done in preparation for
the major study (Polit et al., 2001). However, a pilot study can also be the pre-testing or 'trying
out' of a particular research instrument (Baker 1994: p182-3). Baker found out that a sample size
of 10-20% of the sample size for the actual sample is a reasonable number of participants to
consider enrolling in a pilot. Although a pilot study does not guarantee success in the main study,
it greatly increases the likelihood.
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As part of the research strategy researcher carried the pilot study to resolve the following factors
prior the main study:
1. Check the instructions are comprehensible,
2. Check the wording of the survey instrument,
3. Check the reliability, practicability and validity of the results,
4. To design a research protocol,
5. Collecting preliminary data,
6. Identifying the logistical problems which might occur using the proposed methods,
7. Determine the actual resources (finance) are needed for the planned study.
Therefore, after I constructed the questionnaire, I piloted it as suggested by most researchers.
This was done by asking the research supervisor, students at the university and some official in
banking industry. I also asked them to comment about the length, structure and wording of the
questionnaire and I altered the questions accordingly.
However pilot studies may also have a number of limitations. These include the possibility of
making inaccurate predictions or assumptions on the basis of pilot data; problems arising from
contamination; and problems related to funding.
3.6 Reliability
Polit and Hungler (1993:p445) refer to reliability as the degree of consistency with which an
instrument measures the attribute it is designed to measure. The questionnaires were answered by
respondents revealed consistency in responses. Reliability can also be ensured by minimizing
sources of measurement error like data collector bias. Data collector bias was minimized by the
researchers being the only one to administer the questionnaires, and standardizing conditions
such as exhibiting similar personal attributes to all respondents, for example, friendliness and
support. The physical and psychological environment where data was collected was made
comfortable by ensuring privacy, confidentiality and general physical comfort.
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3. 7 Data Analysis and presentation
The secondary data obtained were scrutinized to determine their suitability, reliability,
adequacy and accuracy.
Primary data
Due to the inherent noisy nature of raw data, questionnaire entries have to be processed
before being applied into any analytical models. To make a reasonable conclusion about the
topic descriptive data analysis tools were used (mean ,variance and standard deviation). SPSS
version 16 and simple excel were used to process the data for the analysis. Tables and statistical
diagrams like bar charts, pie charts and line graphs also aided in the data presentation and
narrations.
Mean was used to measure central tendency while variance and standard deviation were used to
measure level of dispersion. Mean summaries the essential features of a series and in enabling
data to be compared. It is a relatively stable measure of central tendency. But it suffers from
some limitations viz., it is unduly affected by extreme items; it may not coincide with the actual
value of an item in a series, and it may lead to wrong impressions, particularly when the item
values are not given with the average. However, mean is better than other averages, especially in
economic and social studies where direct quantitative measurements are possible.
Standard deviation and variance were used to show the dispersion of data analysed from the
central tendency. The variance and standard deviation are two useful measures of spread. The
variance is the mean of the squares of the individual deviations. The standard deviation is the
square root of the variance.
Presentation of the data on these statistical tools made the analysis very easy. The statistical tools
used conveyed the meaning of the figures captured and as such made the analysis
straight forward.
3.9 Conclusion
Descriptive data was used in the research. The researcher defined a well laid out plan of
gathering the required data. The success in accessing most of the data from the financial
institutions using the defined tools meant it was possible to determine the performance of
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Zimbabwean Banking sector with more accuracy following chapter outlines gathered
information.
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CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.0 Introduction
This chapter report on the findings of the study. The findings are presented first, with an
analysis of the data following and then comments are made based on the findings.
Presentation of statistical data takes the form of tables, pie charts and graphs with content
analysis being used for non-statistical data. The data presentation took cognizant multiple
sources of data relevant for the research objectives and questions with the effort to offer balanced
conclusion for the research study.
4.1 The Response Rate
The diagram in figure 4.1which follows shows a summary of the questionnaire returns from the
survey .The response rate was 100% .Of the 12 questionnaires sent to the commercial banks all
of them were returned. The information on the response rate is illustrated as follows:
Figure 4.1 Response rate on different types of banks

Government
8%
Locally owned
42%
Foreighn
50%
Source: Primary Data
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4.1.1 Position held by respondent
The research questions targeted credit analysts and head of risk departments mostly since they
are the ones who are well versed with the subject of lending and hence the problems of
non-performing loans. Bank managers, supervisors and others who include account relationship
managers and directors were also allowed to answer the questionnaires with the view of having a
wide range of ideas from different people in different positions. The statistics obtained on the
position held is shown on the pie chart in figure 4.2 which follows.
Figure 4.2 Position held of respondent

Frequence
Percentage
3
1
8%
59%
1
25%
8%
Bank manager
Credit analyst
Supervisor
others

The response rate was satisfactory given that most of the questionnaires were distributed
midmonth up to the late date of the month. During these period managers and credit analysts, for
most banks would be busy with work considering that it will be the peak days for doing business
and processing reports.
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4.1.2 Years of working experience on the position held
Their working experience of respondents was also captured in order to analyze the scope of
knowledge from respondents on the subject of non-performing loans. The years of working
experience was also a significant factor in the collection of data since it assisted with extensive
information on the issue of non-performing loans. Results obtained shows that the majority of
respondents had more years of working experience which means the collected results are
highly reliable upon. The results on working experience are shown by way of bar graphs in
figure 4.3 which follows.
Figure 4.3: Years of experience of respondents
40%
40%
35%
30%
27%
27%
25%
20%
15%
10%
6%
5%
0%
less than 1 year
2-5 years
5-10 years
10 years and
above
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4.1.3 Analysis of the administration and demographic section
The statistics of bank types shows a mean of 1.58 and a standard deviation of 0.668 from the
mean which means that there was a great difference on the types of banks approached making
the results more effective since each bank had its own policies on lending which is different from
the other.
The respondents position standard deviation of 0.606 indicates that the questionnaire was
able to capture the views of respondents in different positions which render it effective also.
Years of working experience was once more a crucial factor to consider taking into account that
the research needed people with an experience in order to come up with strategies of
solving the problem of NPLs. The results of the alluded to statistics are shown in table 4.1
Table 4.1 Analysis of the administration and demographic section
Factor
Number of respondent
Mean
Variance Standard Deviation
Type of bank
12
1.5833
0.66856
0.447
Respondent's position
12
2.3333
0.7785
0.606
Years of experience
12
2.9167
0.9962
0.992

4.2 Presentation on analysis and interpretation of non-performing loans
4.2.1 Basic Understanding of Non Performing Loans
The majority of respondents which constituted 42% answered that the given definitions were all
correct. Only a few selected on the given definitions with 22% agreeing that NPLs are loans 90
days past due and still accruing interest whilst 17% agreed that they are loans which maturity
date has passed and payment in full has not been made and 8% responded that they are advances
by a financial institution that are not earning income and full payment of principal as
well as loans which have been placed in nonaccrual, taken off income statement and real
estate have been foreclosed upon. Results shown in fig4.4
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Figure 4.4 Definition of NPLs
An advance by a
financial
institution that is
not earning
income and full
payment of
principal
All of the above
8%
42%
Others
0%
A loan which maturity

date has passed and
payment in full has not
been made
17%
Loans 90 days past

due and still accruing
interest
25%
A loan where the

borrower is not likely
to pay any interest nor
to repay the principal
8%

4.2.2 Classification of Non-performing Loans
Respondents were also asked their views regarding the classification of NPLs of which
the majority concurred that 90 days and above was the class whilst others responded that
they are classified them into loans which shows no sign of repayment even if 90 days has not yet
passed. These results are shown in figure 4.5 which follows.
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Figure 4.5 Classification of NPLs
92%
8%
90 days and above
others

Analysis of Categories and Causes of NPLs
Table 4.2: Analysis of categories NPLs
Std.
N
Mean
Deviation
Variance
Categories of NPLs
12
2.0833
.28868
.083
Valid N (listwise)
12

Non-performing loans were classified according to the length of delinquency period and of the
fourteen respondents a mean of 2.0833 was obtained which favours the period of ninety days and
above with a standard deviation of 0.2886 as well as a variance of .083 which indicates that most
of the respondents had the same answer prior to the number of days a loan has to pass through
before it qualify to be a non-performing one.
4.3 Causes of NPLs
The causes of NPLs were also asked and most of the respondents classified them as being caused
by both bank and macro-specific factors. Only a few respondents attributed the causes to
macroeconomic causes only. The results are also shown in fig4.6 below.
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Figure 4.6 causes of NPLs
Bank specific factors
8%
Macro economic
Factors
25%
Both macro economic

factors and bank
specific Factors
67%
Table 4.3 Analysis of Causes of NPLs

Std.
N
Mean
Deviation
Variance
2.4167
.90034
.811
What are the possible

factors which causes 12
non-performing loans?
Valid N (listwise)
12

Possible factors which cause NPLs were also in question and there was a mean response of 2.41
which was based on both bank specific factors as well as macroeconomic factors with a standard
deviation of 0.900 as well as a variance of 0.811 from the mean. The results of the standard
deviation and the variance indicate that there was a great dispersion from the mean in terms of
respondents views towards the causes of NPLs. This shows that there were a large number of
respondents who supported other factors as well as either of the two.
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4.3.1 Bank specific factors of non-performing loans
The response rate on bank specific factors shows that the factors are almost similar in their
contribution towards NPLs in banks, with the highest being poor credit appraisal which has 16%
followed by excessive lending and ineffective monitoring with 15% each. Non-compliance with
credit policy follows with 14% followed by delayed approval on 13% whilst the rest are
below 10% which are under financing with 7%, marketing problems 9% and lack of business
knowledge with 5% each, diversion of loans with 5% and lastly other factors contributing
1%. The significance of the results is that these factors seem to work in collaboration towards
NPLs.
Figure 4.6.1 Bank specific Factors of NPLs

others
1%
non compliance with

credit policy
14%
lack of business
knowledge
5%
poor marketing
9%
poor credit analysis
16%
excessive lending
15%
delayed approval
13%
ineffective monitoring
15%
under financing
7%
Diversion of loans
5%

4.3.2 Macroeconomic factors of non-performing loans
Macroeconomic factors were also almost related according to the data gathered. Almost
every factor gained a response above 10% with the lowest being other factors which contributed
a 1% towards NPLs. Poor industrial productivity was the highest with a response rate of 20%
whilst high levels of interest rate and high unemployment levels were second highest
with a response rate of 16% each. Poor GDP was the third factor from highest in its
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contribution to NPLs with 14%. Asymmetric information, high inflation levels and poor
weather conditions were fourth in their contribution towards NPLs with a response rate of 11%
each.
Figure 4.6.2 Macro economic factors of NPLs
Inflation
11%
Increase in
unemployment
16%
Information
Assymetry
11%
others
1%
Poor weather
conditions
11%
Poor industrial
productivity
20%
High levels of interest

Rates
16%
Poor GDP Growth
14%

4.3.3 Ranking of causes of non-performing loans
The causes of NPLs were also ranked according to a scale which ranges from 1-5 with
5 being the highest and 1 being the lowest. Respondents ranked poor credit appraisal,
diversion of loans and lack of business management knowledge as the highest factors causing
NPLs with modal frequencies of 10, 5 and 5 respondents each respectively. Under financing and
marketing problems were cited as the second highest causes of NPLs with each having a
modal frequency of 4 and 8 respondents respectively. Ineffective monitoring and poor
weather conditions for agricultural activities were ranked third from highest in causing
NPLs with a modal frequency of 4 respondents each. Non-compliance with the banks credit
policy was the fourth from highest in promoting NPLs with a modal frequency of 5 respondents.
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Lastly delayed loan approval was the least with a rank of 1 and a modal frequency of 6
respondents. The results of these respondents are represented in the following table 4.2
Table 4.4 Ranking of the causes of NPLs
Cause
Frequency Ranking
Delayed loan approval
10
Diversion of loans
Under financing
Ineffective monitoring
Lack of business management knowledge
Non-compliance with credit policy
Marketing problems
Excessive lending
Poor weather conditions
Total
57
4.4 Strategies to deal with NPLs

Respondents were also asked to rank strategies to deal with non-performing loans inorder of their
importance
4.4.1 Strategies of dealing with non-performing loans at individual bank level
At individual bank level respondents rated construction of good credit culture and independent
credit review process as extremely important strategies of dealing with NPLs. They also rated the
establishment of professional teams as a very important strategy of dealing with NPLs.
Centralized management style and selling of non-performing loans were classified as important
strategies of dealing with NPLs. The results of these respondents are shown in the table4.3
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Table4.5: Strategies at Bank level
Strategies at Bank Level
Frequency
Rank
Construction of good credit culture
extremely important
Establishment of professional teams
Very important
Selling or refinancing of non-performing loans
11
Important
Independent credit review process
extremely important
Total
35

4.4.2 Strategies at National level according to their order of importance
Strategies of dealing with NPLs at macroeconomic level were also ranked according to their
order of importance. The results showed that securitization of non-performing loans and setting
up of asset management corporations are extremely important strategies of dealing with NPLs.
Assistance from asset reconstruction companies and seeking of redressal against defaulting
companies were found out to be very important strategies of dealing with NPLs. Initiation of
winding up proceedings against defaulting companies was rated as important in dealing with
NPLs. The results of these are again represented in table 4.4.
Table 4.6: Strategies at National Level
Strategies at National Level
Frequency Ranking
Securitization of NPLs
extremely important
Set up Asset Management Corporations
Very important
Assistance from asset Reconstruction Company
Important
Redressal against default
extremely important
Winding up of defaulting companies
Important
Total
29
4.5 Challenges in Managing NPLs

The length of the time it takes for banks to effectively recover their debts is one of the major
challenges that was noted by 25% of the banks. They explained that judiciary system is highly
bureaucratic and hence it takes a long time to get a court judgement. There some incidents when
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the defaulters appeal to a superior court. 8.3% also argued that restructuring also prolongs the
time it takes to fully recover debts. However banks can reduce time taken in lawsuits by coming
with a legally enforceable agreement at the pre-trial conference stage as noted by 50% of the
respondents.
The banking sector has not been spared from the ill effects of the poor macro-economic
conditions. 58.3% of the population noted that companies are failing to pay up their debts
because of the inconsistent cash flows from their businesses. Some individuals are also not
receiving their salaries on time; this negatively translates to the financial institution. The
economic environment also does not support derivative trading hence there is no securitisation as
noted by 25% of the respondents. 33.3% of the respondents revealed that the macroeconomic
environment is not supportive of effective NPL management. It is also relevant to note that
Zimbabwe is facing challenges that other countries like China and German faced in their
financial crises as noted by Fung and Ma (2002).
ICTS challenges were a problem that was noted by 17% of the sample population. Failure to
effectively run a client database can make the process of NPL management difficult.
Some clients were over borrowed; this then reduced their repayment capacities as noted by 25%
of the respondents. This could also be related to the sub-prime lending that took place at the
onset of the dollarization era. 8.3% of the respondents agreed that banks were aggressively
lending to different clients in a quest to gain market share. As a result proper credit analysis was
not done. 16.7% noted that their NPLs were as a result of lending to related companies. The
presence of intercompany guarantees would make it impossible for the banks to recover the loans
in full. The problem is related to inadequate screening methods employed by the banks in the
lending process.
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Figure 4.7: Challenges in Dealing with NPLs
Frequence
Frequence
33%
25%
17%
17%
3
8%
1
Time period
Economic Challenges Economic challenges Economic and period

and ICT problems
challenges
Overborrowed
clientsand lack of
colletaral,subprime
lending

4.6 Factors to promote effective management of NPLs
The majority respondents selected improve corporate governance and risk management with
response rate of 18% .Good corporate governance is an important factor as noted by Cadbury
report 1992. If believed that if internal controls are not in force, it will be difficult to hold
individual officers responsible for either authorizing or collecting loans. Bank officers would
then lack the incentive to pursue debt recovery actively. These internal challenges however were
not experienced by every bank under study and because 90% of the respondents corrected by
devoting more resources to NPL management.
More over 13% of the sample population also required the implementation of a credit bureau.
This is because credit bureaus help prevent subprime lending. All borrowers would be assessed
from the bureau before credit is extended to them. The problems of subprime lending and over
borrowing would be reduced significantly. It is however important to note that 8.3% of the
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respondents argued that a credit bureau would only help in the credit screening process and not
in the mitigation of the current NPLs.
A judiciary system overhaul was believed to be a possible solution by 10% of the respondents.
This would help in reducing the bureaucracy and thus effectively reducing time spent in courts.
In contrast Xu (2005) stated that Korea, Thailand, and Japans experiences demonstrate that a
key factor to succeeding in NPL recovery is a transparent and user-friendly insolvency law
framework that gives creditors adequate protection.
As most companies are struggling to meet their obligations, 15% of the banks suggested that a
distressed companies fund should be set aside by the government. The fund would help viable
but struggling firms find their capacity to maximise production. 167% In the long run, these
companies would be able to repay their obligations as well as improve the liquidity challenges in
the banking sector. Conversely 8.3% of the respondents noted that it somehow may create
dependency problems and the information asymmetry would make it difficult for the government
to subjectively choose the firms that are in need.
Technological advancement and with a response rate of 15% . 15% noted that every banks effort
to reduce the challenge of NPLs should be sufficiently supported by effective internal ICTS
systems which ensure the proper NPLs reporting. While establishment of a prudential guide lines
had 8% response rate as a way of reducing NPLS management of NPLs
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Figure 4.8 Factors to Promote effective management of NPLs
Prudential
guidelines
8%
All of the above

5%
others
0%
improve bank
corporate
governance
18%
Distressed
companies
funding
15%
Setting Credit
bereau
13%
Technological
advance
15%
Judiciary system
improvement
10%
corporate
rehabiliation and
debt restructuring
16%
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4.7 Analysis of the summarized results

Table 4.7 Analysis of summarized results
Factor Mean Standard deviation
Mean
Standard deviation
Definition of NPLs
20%
17%
Bank specific causes of NPLs
10%
6%
Macroeconomic causes of NPLs
13%
5%
Ranking of Strategy of dealing with NPL at bank level
14%
10%
level
14%
8%
Factors that promote the effective management of NPLs
10%
5%
Ranking strategy of dealing with NPL at macroeconomic

The information sought section which tends to focus on the major issues under investigation
revealed that a mean of 20% agreed to the definitions which were given by the questionnaire. A
standard deviation of 17% from the mean shows a reasonable figure since there are various ways
in which people defines NPLs and such people are represented by such a percentage.
The bank causes of NPLs revealed a mean of 10% respondents who suggested all the factors
responsible for NPLs as given by the questionnaire. A standard deviation of 6% from the mean
indicates less dispersion which means most people tend to agree on almost similar factors which
causes NPLs. Macro-economic factors of NPLs shows a mean of 13% and a standard deviation
of 5% which is also related with bank specific causes in that peoples views on the factors which
accounts for NPLs were almost similar.
Ranking of strategies of dealing with NPLs at bank level had a similar mean with ranking of
strategies at macroeconomic level which is 14% and standard deviations which were almost
similar that is of 10% and 8% respectively. This indicates a similarity on peoples views on the
strategies of dealing with NPLs as the dispersion from the mean is not much higher.
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Factors that promote effective management of NPLs had a mean of 10% and a standard deviation
of 5% which indicates a low mean and low dispersion from it meaning to say that there is less
differences on peoples views on these factors.
4.8 Conclusion
The results collected were able to answer the research topic as well as the research questions
which were aimed at finding the strategies of eradicating NPLs which are currently affecting
Zimbabwean banks. The results clearly indicates that there are strategies which banks should
undertake in order to minimize the risk of failure as shown by respondents various suggestions
on the subject as outlined in this chapte
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CHAPTER FIVE
SUMMARY OFFINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.0 Introduction
This chapter entails a summary of the research findings and the methods used in obtaining the
data for the study. It further provides conclusions and recommendations relating to the study
objectives. In addition, suggestions for future research on the study would be given.
5.1 Summary of Research Findings
Research found that NPLs are caused by both bank specific factors and macroeconomic factors.
Bank specific factors of non-performing loans that were found by the study include delayed loan
approval, poor credit appraisal, diversion of loans, under financing, ineffective monitoring, lack
of business management knowledge, and non-compliance with credit policy, marketing problems
and excessive lending The research also found macroeconomic factors of NPLs as poor weather
conditions, poor industrial productivity, poor GDP growth, an increase in the unemployment
rate, high interest rates, high levels of inflation rate and asymmetric information. Causes of NPLs
were also ranked and it was found that poor credit appraisal, diversion of loans and lack of
business management knowledge was the highest factors causing NPLs. The least cause of NPLs
was delayed loan approval.
Findings also indicated that there is an upward trend in non-performing loans since the adoption
of multicurrency in 2009. Findings further indicated that non-performing loans have negatively
affected the performance of the banks in terms of liquidity and profitability.
The strategies of dealing with NPLs at both individual bank level and macroeconomic level were
also ranked and it was found that the most important factors at bank level include construction of
good credit culture and independent credit review process. Establishment of professional teams
was rated as very important strategies of dealing with NPLs whilst centralized management style
and selling of non-performing loans were classified as important strategies of dealing with NPLs.
At macroeconomic level securitization of non-performing loans and setting up of asset
management corporations were found out to be extremely important strategies of dealing with
NPLs. Assistance from asset reconstruction companies and seeking of redressal against
defaulting companies were found out to be very important strategies of dealing with NPLs.
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Initiation of winding up proceedings against defaulting companies was rated as important in
dealing with NPLs
This study also shows that, management process banks face different challenges in managing
NPLs.
A weak judiciary system, time constraints, poor macroeconomic conditions, ICTS
challenges, poor organizational structures, over borrowed clients and subprime lending were the
challenges that were notably most common amongst the banks. The researcher also
acknowledged that, a judiciary system improvement, economic turnaround, distressed companies
fund and a credit bureau were mostly prescribed as solutions to the challenges being faced by
banks. . The study moreover found the factors that promote the effective management of NPLs
5.2 Conclusions
The findings as briefly summarized above give rise to some conclusions that there is an
opportunity for commercial banks to change their bad loan books to be able generate revenue. It
is evident from the findings that there are several strategies of dealing with NPLs.
Causes of NPLs
The study concluded that there are various factors which can cause NPLS. These factors are both
macroeconomic causes and bank specific causes. Bank specific and macroeconomic factors such
as poor management systems and asymmetric information which leads to adverse selection and
hence moral hazards by borrowers can be concluded to be the causes of NPLs. These results
conformed to the empirical findings such as that of Salas and Saurina (2002) that combined
macroeconomic and microeconomic variables as explanatory regressors to explain NPLs in a
study which was concerned with Spanish Commercial and Savings Banks (for the period 19851997). They estimate a statistically insignificant effect of lagged efficiency on problem loans
(probably as a consequence of the counteraction of the bad management and skimping
effects) and a negative influence of lagged solvency ratio to NPLs which is consistent with the
moral hazard hypothesis. In addition, they find a size effect i.e. large banks seem to have fewer
NPLs. Furthermore, empirical evidence such as that of Espinoza and Prasad (2010) which
focused on macroeconomic and bank specific factors influencing non-performing loans and their
effects in GCC Banking System were also in line with the results obtained.
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Strategies of dealing with NPLs
The research also concluded that there are strategies of dealing with NPLs and these include
construction of good credit culture, establishment of professional teams, loan restructuring and
centralized management style. Such a conclusion agrees with several past researchers.
Researchers such as Guo Ning-ning (2007) put forward suggestions on how to solve the NPLs
problems in Chinese commercial banks. He suggested that there was need to establish scientific
and clear business development strategy and risk management strategy on the lending sector.
Morgan and Stanley (2013) research estimated that Europes banks need to sell or refinance
700 billion of NPLs to meet regulatory capital requirements, deleverage their balance sheets
and achieve other goals as well as that of Sirtaine (2011) which argued that construction of good
credit culture is the important condition to eliminate NPL proved to be correct and as such
commercial banks need to embrace them so as to eradicate the problem of NPLs which they are
facing. These were again concluded to be the strategies of dealing with NPLs from the results of
the research.
Challenges in managing NPLs
This study also shows that, the in the NPL management process banks face different challenges.
A weak judiciary system, time constraints, poor macroeconomic conditions, ICTS challenges,
poor organizational structures, over borrowed clients and subprime lending were the challenges
that were notably most common amongst the banks. The researcher also acknowledged that, a
judiciary system improvement, economic turnaround, distressed companies fund and a credit
bureau were mostly prescribed as solutions to the challenges being faced by banks.
Factors that promote the effective management of NPLs
Lastly the research concluded that the factors that promote the effective management of NPLs
include the establishment of an appropriate legal framework, corporate rehabilitation, debt
restructuring, upgrading of Information, Communication and Technology and setting up of a
credit bureau as well as training of staff and improvement of corporate governance of banks.
This concurs with the works of Chikoko et al (2012) who pointed out on the need to upgrade
Information and Communication Technology (ICT) in order to be able to implement models that
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will mitigate risks arising out of the environmental changes and the need for urgently setting up
of a credit bureau that will facilitate the dissemination of credit information.
5.3 Recommendations
Basing from the research findings, recommendations were spelt out, so as to help commercial
banks on better ways and strategies of managing and dealing with NPLs. These
recommendations were intertwined to the current prevailing economic environment, to boost and
mark a leeway for commercial banks survival strategies.
5.3.1 Recommendations to Commercial banks
Upgrade Information and Communication Technology Systems (ICTS)
It is difficult for banks to report the real levels of their NPLs without a proper reporting system.
Banks therefore should upgrade their ICT systems in order for them to detect the early warning
signs of accounts that are going under. If these signs are treated early, it is possible that the nonperforming accounts can be nursed back to health.
Adoption of good corporate governance practices.
Corporate governance describes the manner in which the board of directors and its senior
management govern the whole business affairs, aligning them to defined corporate activities and
behavior that ensure compliance and safety (Basel Accord, 1997). There should be greater
accountability in lending activities, as this helps to improve the level of credit business
understanding by other related members who are not engaged in the lending business, and allow
effective incorporation of risk-adjusted return principle on any deviation. To ensure good
corporate practices, banks should also ensure that all its loan board members are suitably
qualified for their lending positions, not subject to any undue influence from inside or outside
environment to improve the lending decisions. Commercial banks must also reinforce the
importance of strong internal systems used in credit risk management, to enable efficiency of
staff engaged in the lending business. This will help the bank to manage credit quality, generic
market spreads and substantial specific repayments concerns. The principle of open
communication should be developed as a culture by all members related in the lending business.
The open communication must be complimented by feedbacks from all corners of lending
business environment, either within or externally, to avoid the effects of information asymmetry.
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Continuous monitoring of borrowers
Even if the credit analysts have thoroughly assesses the borrower, there should be an ongoing
monitoring and loan supervision through careful review of current credit out standings to avoid
surprises. The banks reporting system should generate accurate and timely reports, which will
be used to measure the level of bank exposure based on predictable and indicated risky loans. It
should maintain up-to-date information about the credit performance of borrowers, marking all
the borrowers changing circumstances. Credit monitors should employ all early warning
indicators, as they mark the turnaround points of sound loans into risky loans. This will help
banks to effectively employ some workout procedures and mitigate themselves against the
impact of N.P.Ls. If timely action is not taken to address probable problem loans, opportunities
to strengthen or collect on these poor quality assets may be threatened and missed, resulting in
future losses, which in turn threatens the banks solvency.
Capitalisation levels
Adequate capital acts as a buffer that can protect a bank from adverse business cycles. Banks
should aim therefore to increase their minimum capital and meet at least the Basel II standard.
These would help with liquidity challenges that most undercapitalised banks face. If a bank is
adequately capitalised, creditors confidence is enhanced and thus reducing the likelihood of
bank runs.
Employment of qualified credit personnel
Effective employment of highly skilled, experience, trained and knowledgeable personnel could
also help commercial banks to counter effect the continuous enlargement of poor credit quality.
The degree of expertise has a significant implication on the analytical capabilities of credit
analysts, and credit risk management capabilities sufficient to harness the robustness of the risk
management framework and methods employed. Hence commercial banks should 56 make sure
that its staff has both the technical and interpersonal skill in both analyzing the credit information
and relating with bank borrowers.
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Continuous review of credit guidelines
Commercial banks in our current Zimbabwean economy have to continuously review their credit
guidelines, so as to avoid using outdated methods. All credit guidelines should be reviewed and
updated in line with the current economic and financial developments and their demands. This
will help banks to review and know the nature of loans to give to loan applicants (loan types),
security type required for a given loan size, and drafting of appropriate loan contract terms in
line with the market requirements.
Continuous review of credit assessment skills
Commercial banks should contentiously update the credit assessment skills of credit analysts and
other related parties engaged in the lending business. This will help to improve the nature of
lending decisions made. They should be acquitted with new market and environment
developments, so as to adjust their lending behaviors, while at the same time maintaining their
loan quality.
The Use of Credit Bureaus or Credit Reference Agencies
Banks do not have adequate capacity to screen and monitor their borrowers and therefore
distinguish between good and bad risks. The credit markets have been faced with adverse
selection and moral hazard problems attributed to information asymmetry among lenders and
borrowers. It is therefore important that lenders supplement their information about borrowers
with that of other lenders through the establishment of a credit bureau. The bank should use
credit reference agencies in for the purpose of determining the creditworthiness of borrowers as a
means of minimizing bad loans. Credit bureaus keep information on people for the purpose of
assessing their creditworthiness in the granting of credit to them. Credit bureau system provides
timely, accurate, and up-to-date information on the debt profile and repayment history of
borrowers. This would enable the bank identify good customers and thus minimize loan default.
5.4 Suggestions for future researches
A major limitation on this study was time constraint which led to the use of census approach
supported with a combination of secondary and primary data for the collection of data. In future,
different methods of research could be used for study of the same topic or other related aspects
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of the topic. Specifically, a future study might research into strategies of solving the problems of
NPLs in different sectors with emphasis on agriculture which is one of the key sectors banks
perceive to contain high risk in terms of loan repayment. There is also a need for a study to be
carried out on how banks and the courts can work hand in hand at least to cut down the level of
loan defaults. Moreover future researches could look into the impact of dollarization on levels of
NPLs and how people can make use of the opportunities of dollarization in reducing NPLs.
Lastly there is a need to research on the issue of corporate governance in banks, particularly on
the lending sector and how best it can be fully utilized so as to have no bank specific causes of
NPLs since corporate governance is still at its infancy in developing countries especially in
Zimbabwe.
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REFRENCE
1. African Development Bank, 2., 2012. Zimbabwe Monthly Economic Review.

August.Issue Issue No. 7,.
2. Barth J. R, C. G. J. a. L. R., n.d. Bank Regulation and Supervision: What Works Best?.
Journal of Financial Intermediation,, pp. 205-248..
3. Berge T.O and Boye K.G, 2007. An analysis of banks problem loans, Norges Bank
Economic Bulletin 78. p. 6576.
4. Greenidge K and Grosvenor T, 2010. Forecasting non-performing loans in Barbados..
Journal of Business, Finance and Economics in Emerging Economies,5, pp. 80-107.
5. Ministry of Finance, 2., 2012,2013. Mid-Year Fiscal Policy Review,. July.
6. Mitsuru Taniuch, 1997. Recent Development in Japans Financial Sector: Bad Loans and
Financial Deregulation. Journal of Asian Economics, Volume Vol.8 No.2, pp. 225-244.
7. Najaf, M., 2008. determining of effective factors in creation of non-performing loans
from Tehrans Bank-e-Mellat managers and experts viewpoint and compare with
debtors view point. M.A. thesis in public management.
8. Rajan, R. & S.C., Dhal,, 2003. non-performing loans and terms of credit of public sector
banks in India: an empirical assessment. Reserve Bank of India occasional papers, pp.
24(3):81-121.
9. Reserve Bank of Zimbabwe, 2012,2013,2014. Mid-Term, Monetary Policy Statement,.
July.
10. Resti A, 1995. Linear programming and econometric methods for bank efficiency
evaluation: an empirical comparison based on a panel of Italian banks. Working paper
(No.21).
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11. Richard E, 2011. Factors That Cause Non Performing Loans in Commercial Banks in
Tanzania and Strategies to Resolve them. Journal of Management Policy and Practice
12(7).
12. Rouse, C., 1989. Bankers Lending Techniques, London,. Chartered Institute of Bankers.
13. Saba, I., Kouser, R. & M., Azeem,, 2010. determinants of non-performing loans: case of
US banking sector,. The Romanian economic journal,, pp. 44:125-136.
14. Santomero, Anthony M.,, 1984. Modeling the Banking Firm: A Survey, Journal of
Money, Credit and Banking. Part 2: Bank Market Studies, Volume Vol.16, pp. 576-602.
15. Saunders, M., Lewis P. and Thorn hill A., 2007. Research Methods for Business Students.
(4thEdition) ed. s.l.:s.n.
16. Shih, Victor,, 2004. Dealing with Non-Performing loans: Political Constraints and
Financial Policies in China. The China Quarterly 180,, December, pp. 922-944.
17. Sinkey, Joseph. F. & M.B. Greenwalt,, 1991. Loan-Loss Experience and Risk-Taking
Behaviour at Large Commercial Banks. Journal of Financial Services Research,, pp. 4359.
18. Sinkey, Jr., Joseph, F.,, 2002. commercial bank financial management,. New Jersey:
Prentice Hall,.
19. Stolz, S., 2002. The Relationship Between Bank Capital, Risk-Taking, and Capital
Regulation: A Review of the Literature. Kiel Working Paper No.1105.
20. Suzuki, K., n.d. Rethinking Japans Bad Loan Management: Implications from a
Comparison with the Swedish Case.. s.l.:s.n.
21. Taggart, Robert A, & Stuart I. Greenbaum,, 1979. Bank Capital and Public Regulation.
Journal of Money, Credit and Banking,, May, Volume Vol.10, pp. 158-169.
22. Waweru N. M and Kalani V.W, 2009. Commercial Banking Crises in Kenya: Causes and
Remedies. African Journal of accounting, Economics, Finance and Banking Research, 4
(4),, p. 12 33..
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23. Westermann, F., 2003.. The credit Crunch: A Comparison of Germany and Japan,. C S
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APPENDIX
RESEARCH QUESTIONNAIRE
Dear Sir/ Madam.

My name is Everlast Dzingai, and I am a student at National University of Science and
Technology, studying towards B.Comm (Honours) Degree in Finance. I am undertaking a
Research Project in partial fulfillment of my studies titled: Analysis of ways to deal with
non-performing loans affecting Zimbabwe commercial banks . The study is aimed at
developing a better understanding of the strategies and methodologies to deal with nonperforming loans affecting Zimbabwe commercial banks. This study will help all the
stakeholders concerned to develop better ways to deal with non-performing loans and hence
reduce credit risk exposure of banks.
May you kindly assist by filling in the questionnaire attached? Please note that confidentiality is
guaranteed.
I would like to express my gratitude in advance for your cooperation.
Yours faithfully
Everlast Dzingai
.
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QUESTIONNARE
Kindly fill-in the details outlined below. Your attention to this matter is greatly
appreciated.
Tick in the box provided or give a brief explanation on the blank spaces where
appropriate.
Question 1
a) Type of Bank
Locally owned
Foreign owned
Government owned
b) Position held by respondent

Bank Manager
Credit Analyst
Supervisor
If others specify________________________________________________________
c) Years of working experience on the position held
Less than1 year
2-5years
5-10years
above 10years
Question 2
Questions about respondent understanding about non performing loans
a) What do you understand by the term non-performing loan(s)?

An advance by a financial institution that is not earning income and full payment of
principal
A loan which maturity date has passed and payment in full has not been made.
Loans 90 days past due and still accruing interest.

A loan where the borrower is not likely to pay any interest nor to repay the principal
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All of the above
If others specify:________________________________________________________
________________________________________________________________________
b) Which of the following categories do you classify loans as non-performing?

Less than 90days
90 days and above
If other specify:________________________________________________________
Question 3
Questions about the causes of non-performing loans
a) What are the possible factors which causes non-performing loans?
Macroeconomic factors
Bank specific factors
Both Macroeconomic and bank specific factors
If others specify:______________________________________________________
b) Which of the following are bank specific factors of non-performing loans?
Diversion of loans
Under financing
Marketing problems
Excessive lending
If other specify:________________________________________________________
c) Which of the following are macroeconomic factors of non-performing loans?
Poor industrial productivity
Poor GDP growth
An increase in the unemployment rate
High interest rates
High levels of inflation rate
Asymmetric information
If other specify:_________________________________________________________
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d) How would you rank the following factors as causes of bad loans using a scale of 1
to 5 with 5 being the highest and 1 the lowest?
Diversion of loans
Under financing
Marketing problems
Excessive lending
Question 4
Strategies to deal with non-performing loans at bank level
a) Rank the following strategies to deal with NPLs at individual bank level in order of
importance.
Strategy
Frequency
Ranking
Construction of good credit culture
7 extremely important
Establishment of professional teams
9 Very important
Selling or refinancing of non-performing

loans
11 important
Independent credit review
Centralized management style
Important
Total
40
b) Rank the following strategies at National level according to their order of

importance.
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Strategy
Frequance
Rank
Securitization
Asset Management corporations
4 Very important
Asset Management companies
5 Important
winding up against defaulting companies
extremely important
Redress against Default
Important
Total
29
c) What challenge is mainly faced by your institution in managing NPLs?
Answer:___________________________________________________________
__________________________________________________________________
:_________________________________________________________________
d) Factors which promote effective management of NPLs

Improve bank corporate governance
conducive legal environment
Technological advance
corporate rehabilitation and debt restructuring
Setting up credit bureau
Prudential guide lines
All of the above

If other specify:_________________________________________________________
...............................................................END
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Analysis of ways to deal with non-performing loans affecting Zimbabwe Commercial Banks

ANALYSIS OF WAYS TO DEAL WITH NON-PERFORMING LOANS

The Approval Form

Reserve Bank of India

Reserve Bank of Zimbabwe

Recovery of Debts Due to Banks and Financial Institutions Act

Collateralized Loan Obligations

Debt Recovery Tribunal

Monetary Policy Statement

Peoples Bank of China

Information, Communication and Technology

International Monetary Fund

Mortgage Backed Securities

Asset Backed Securities

Asset Management Corporations

Asset Reconstruction Company

Bank of International Settlement

Company Law Board

Securitization and Reconstruction of Financial Assets and Enforcement of

security Interest Act

Table 4.1 Analysis of the administration and demographic section ............................................. 48

Non-performing loans could rise further with the

ongoing deceleration in economic activity (IMF, 2012).

at least reduce the rate of non-performing loans in

To find out the causes and types of non-performing loans.

To determine the strategies of dealing with non-performing loans at individual bank

To identify challenges commercial banks faces in managing non-performing loans

To inaugurate ways of eliminating non-performing loans at national level in Zimbabwe.

1.4 Research questions

What is the meaning, causes and types of non-performing loans?

What are the strategies of eliminating non-performing loans at national level

1.5 Scope of the study

The management of the research population at some instances might be unwilling

1.8 Organization of the study

creating assets is to earn income and the lender will be able to

2.2 Causes of non-performing loans

diversified debt portfolio loss rates. The

Figure 2.1 : Causes of rise in non-performing loans 2013

and has also been

linked to the absence of a credit

referencing system to facilitate sharing of credit information resulting in high levels of

SOURCE: Zimbabwe Stock Exchange: Quarterly Industrial Report September (2014)

national level and also outlined various challenges by banks in managing

On the other hand, qualitative research, which predominantly

Figure 4.1 Response rate on different types of banks

Source: Primary Data

Figure 4.2 Position held of respondent

Source: Primary Data

Figure 4.3: Years of experience of respondents

Source: Primary Data

Variance Standard Deviation

Source: Primary Data

A loan which maturity

Loans 90 days past

A loan where the

Source: Primary Data

90 days and above

Source: Primary Data

Source: Primary Data

Both macro economic

Source: Primary Data

Table 4.3 Analysis of Causes of NPLs

What are the possible